NZ's annual inflation rate falls to 3.5pc

The annual inflation rate, as measured by the Consumer Price Index (CPI), fell from 4.0 per cent to 3.5 per cent in the September quarter, Statistics New Zealand (SNZ) said today.

Inflation for the quarter was 0.7 per cent. Both figures were below the expectations of economists and the Reserve Bank and may give the bank pause for thought in its review of official interest rates tomorrow.

A majority of economists predict Reserve Bank governor Alan Bollard to lift the Official Cash Rate (OCR) to 7.5 per cent from 7.25 per cent.

"A good result, below market," said UBS economist Robin Clements. "To my mind it helps me be more confident that (the central bank) ought not do anything tomorrow.

"Whether it is enough to pull them back from the brink if they were going to is more debatable, but it certainly gives them more breathing space."

The median prediction from a Reuters poll had been for an annual figure of 3.6 per cent and a quarterly rise of 0.8 per cent. The Reserve Bank was expecting 3.8 per cent for the year and 1.0 per cent for the quarter.

Despite that, September is the fifth consecutive quarter in which the inflation rate has been outside the 1-3 per cent band the Reserve Bank is mandated to maintain by the Government.

The most significant individual upward contributions to the CPI change came from a 15.5 per cent price increase for vegetables, a 6.8 per cent rise in local body rates, and the purchase of new housing up 2.1 per cent.

Most significant downward contributions came from a 4.6 per cent fall in the price of second-hand cars and medical services down 3.5 per cent.

Petrol prices were down 0.8 per cent, following an increase of 14.7 per cent in the June quarter, the largest increase since the September 1984 quarter.

Although petrol prices fell sharply in the September month, the full impact of that fall would not be shown until the December quarter, SNZ said.

The 0.7 per cent increase in the September quarter followed an increase of 1.5 per cent in the June quarter, and 0.6 per cent in the March quarter.

Although the quarterly rise was below the Reserve Bank's expectations, it may still not be enough to convince Dr Bollard against lifting the OCR tomorrow.

Last month, he warned the bank may have to raise rates to contain persistent inflationary pressures.

The Council of Trade Union said the figures showed that inflation was trending downwards.

Economist Peter Conway said if quarterly increases remained at today's level CPI would be below 3 per cent within a year and the CTU hoped the official cash rate would not rise on Thursday.

"Unions will continue to campaign for wage increases above the rate of inflation. There is no evidence that wage increases in the last year have had a significant impact on CPI compared with housing, rates, petrol and electricity," he said.

Analysts have pointed out that the Reserve Bank's main concerns were with housing, the labour market and historically high capacity utilisation.

Six of the 11 groups in the CPI recorded increases in the September quarter.

The housing and household utilities group increased 1.9 per cent, following increases of 1.3 and 0.9 per cent in the previous two quarters.

The food group was up 2.0 per cent, following rises of 0.3 and 1.0 per cent respectively in the June and March quarters.

The transport group was down 1.2 per cent, following an increase of 6.0 per cent in the June quarter and a decrease of 0.5 per cent in the March quarter.

Some other significant individual upward contributions to the CPI included beer up 2.5 per cent, furniture and furnishings up 2.8 per cent and spirits and liqueurs up 3.3 per cent.

Today's figures are the first to be published on a reselected and reweighted basked of goods and services representing CPI price movements.

The relative importance of the goods and services in the CPI basket were reviewed to reflect changes since the previous review in the spending habits of households.


Dollar falls on news

The New Zealand dollar fell around a quarter of a cent to US66.02c on the news.

First NZ Capital economist Jason Wong said that non-tradables inflation remained very strong and that was what the Reserve Bank was focused on.

"It doesn't help the call on tomorrow's decision. It is still very close."

Goldman Sachs JBWere economist Shamubeel Eaqub agreed non-tradable inflation remained a concern but believed Dr Bollard would err to hike rates tomorrow.

"But overall I think the near-term inflation picture has improved quite substantially especially with lower fuel prices."

He forecast a 13 per cent decline in fuel prices in the December quarter which would equal a 2.7 percentage point subtraction from quarterly CPI growth.

"This could result in a headline inflation trend at 3 per cent or below 3 per cent in Q4, so I think the case for an interest rate hike at this point in time, when the economy is clearly slowing, would be misplaced."

Citibank economists Annette Beacher said both tradeable and non-tradeable inflation had peaked. She expected inflation in the December quarter to be only 0.2 or 0.3 per cent.

"All this has to be of considerable comfort to the Reserve Bank and it suits our view that there is no reason for them to tighten again. They should stay hawkish but sit tight on rates."

- NZPA