Price rises below forecasts

By BRIAN FALLOW

Inflation eased in the September quarter and analysts saw little in the details of yesterday's consumers price index data to alarm the Reserve Bank.

The CPI rose 0.5 per cent in the quarter, just below market consensus and Reserve Bank forecasts of 0.6 per cent. Annual inflation fell to 2.6 per cent from 2.8 per cent in June.

Housing costs, which make up 20 per cent of the index, contributed 40 per cent of the CPI rise. Construction costs rose 0.6 per cent, the 14th consecutive quarterly increase.

Rents were up 0.8 per cent, and two-thirds of the annual round of local body rate increases boosted that component of the CPI by 2.5 per cent.

Transport costs fell, including a 2.4 per cent decline in petrol prices (which is expected to reverse in the December figures, reflecting higher world oil prices) and seasonal falls in international and domestic air fares.

Air New Zealand's new low domestic air fares come into effect next month and will show up in the December-quarter CPI.

Electricity prices rose 1.5 per cent and are now 6.1 per cent higher than a year ago.

But food prices were up only 0.1 per cent as 2 per cent falls in meat and milk prices (reflecting weak international prices) offset higher fruit and vegetables prices.

Alcohol prices rose 1.7 per cent, reflecting the annual increases in tax on beer and spirits.

Price increases were considerably less widespread than in the June quarter.

Items representing 61 per cent of the index rose (compared with 70 per cent in June) and the average rise was smaller - 1.6 per cent compared with 2.1 per cent.



Inflation was much more evident in the non-tradables or domestic sectors than in the tradables sectors, which are exposed to international prices and the effects of a rising exchange rate. Annual tradables inflation was 1.6 per cent, but non-tradables inflation 3.6 per cent.

Economists saw yesterday's data as further evidence of an economy which has shifted its weight from its export leg to the domestic one.

Bank of New Zealand economist Stephen Toplis said the economy was on cruise control.

"Monetary settings are near neutral, confidence surveys suggest growth will fall back to trend and now there is clear evidence that inflation is headed for the mid-point of the new target band [1 to 3 per cent]," Toplis said.

The CPI confirmed that the Reserve Bank did not need to do anything soon. Whether the next move would be a push on the accelerator or a dab of the brakes would not be known until well into next year.

Deutsche Bank chief economist Ulf Schoefisch expected the divergence between the external and domestic sides of the economy to continue for the next six or nine months.

"The regions will suffer from the decline in farm incomes, with the expected 8 per cent decline in the terms of trade withdrawing income equivalent to 1.75 per cent of GDP.

"But Auckland will provide a counterweight to that trend."

Just as in the early 1990s, it had taken the city some time to gain momentum from the high commodity earnings last year.

"Activity growth has clearly accelerated, aided by a continued strong inflow of migrants and the America's Cup.

"We expect that momentum to continue until the second quarter of next year before the weakness in the rest of the country begins to dominate."