KEY POINTS:
Tumbling oil prices are expected to deliver a sharp fall in the inflation rate when the December consumers price index is released tomorrow.
The median forecast among economists polled by Reuters last week was for a 0.4 per cent fall in the CPI compared with September, which would reduce the annual inflation rate to 3.5 per cent from an 18-year high of 5.1 per cent.
With some forecasters expecting the rate to drop below 1 per cent by the September quarter, inflation is not seen as any impediment to more cuts in the Reserve Bank's official cash rate.
The money markets have fully priced in a 100 basis point cut in the OCR to 4 per cent on Thursday next week, en route to an ultimate 3 per cent later in the year.
Global oil prices have fallen steeply from their peak last July. By the end of last year petrol prices at the New Zealand pump had dropped 86c or 40 per cent from their July peak.
ASB chief economist Nick Tuffley estimates the fall in petrol alone subtracted 1.2 per cent from the CPI. Without it the quarterly annual inflation rate would be 0.8 per cent.
Weather-related increases in the prices of fruit and vegetable, on the other hand, would have pushed the CPI higher, by 0.25 per cent, Tuffley said.
Westpac economist Doug Steel said free off-peak public transport for the elderly would push down prices, but international air fares would show a seasonal increase, though perhaps not as much as usual given the plunge in jet-fuel costs.
Vehicle prices were something of a wild card, he said. "There is upward price pressure from the lower exchange rate, but downward pressure from high stocks, weak demand and tight credit." On balance he believes vehicle prices fell.
Tuffley said the upward impact of the weaker New Zealand dollar was likely to be more of a factor this year than in the December quarter numbers, and would in any case be offset by the weak state of consumer demand, evident in an earlier than usual start to retailers' end-of-year sales.
"We expect the discounting influence to dominate, though the impact on the CPI will be more modest than a walk through a shopping mall would imply."
Non-tradeables inflation - reflecting those prices, making up about half of the CPI, which are not affected by international competition and the exchange rate - is expected to remain high.
Economists expect increases in the 0.7 to 0.9 per cent range for the quarter. A 0.8 per cent outcome would mean an annual rate of 4.2 per cent for non-tradeables inflation, the highest in three years.
Last month Reserve Bank Governor Alan Bollard took a swipe at those responsible for some of the stickier non-tradeables prices, including power companies and local authorities.
But economists point to last week's NZIER quarterly survey of business opinion as evidence that the central bank has little to fear from inflation over the next year or two.
Firms' views of their own activity were the weakest since 1970. They reported declining cost pressures and a net 3 per cent said they expected to reduce their selling prices, the first time that has happened in 10 years.
The survey also showed increasing spare capacity in the economy, both in labour and in plant and equipment.
The rapid weakening of the labour market would moderate wage growth, Tuffley said, while the steep fall in petrol prices and general inflation would remove elevated inflation expectations as a potential driver of inflation over the next couple of years.
Steel believes annual inflation will be near zero by the September quarter, "such are the ... downward forces from very weak economic activity both globally and domestically".
COOLING DOWN:
* Inflation is thought to have dropped to 3.5 per cent over the last three months of 2008, from 5.1 per cent.
* Some forecasts have it falling to 1 per cent or even lower by September.
* This will allow an outsized interest rate cut by Governor Alan Bollard next week.
