Current conventional wisdom is that the Reserve Bank will not cut the OCR again, but is unlikely to raise it from its current historic low point of 2.5 percent.
Lower prices for food (down 1.8 per cent), household contents and services (down 1.8 per cent), and communication (down 2 per cent) were the main contributors to this quarter's fall. These were partly offset by rises for housing and household utilities and for transport - both up 0.6 per cent.
The fall in food prices was due to seasonally lower vegetable prices (down 16 per cent). Prices for tomatoes, lettuce, and capsicums were about half what they had been in the previous quarter.
On an annual basis, the CPI increased 0.9 per cent in the year to the December 2012 quarter, due to higher prices for cigarettes and tobacco (up 13 per cent), rentals for housing (up 2.4 per cent), and electricity (up 5.2 per cent).
These movements were partly offset by decreases in the price of telecommunication services (down 5.7 per cent), audio-visual equipment (down 17 per cent), and fresh milk (down 9.5 per cent).
The fall for household contents and services was largely due to lower prices for furniture and furnishings (down 6.2 per cent), reflecting higher levels of discounting. "One in four furniture and furnishing prices was discounted in the December quarter, compared with one in five in the September quarter," Pike said.
Petrol prices (down 0.8 per cent) also fell in the December 2012 quarter. They are now 1.7 per cent below their June 2012 quarter peak.
Reacting to this morning's news, Westpac Bank senior economist Michael Gordon said consumer prices were "slightly below expectations, with the annual inflation rate just barely lifting from the 13-year low recorded in the September quarter."
"Despite the uncomfortable headline we think the implications for the Reserve Bank are limited, and our view remains that the Reserve Bank will begin raising the OCR in September this year," said Gordon.
"The surprises continue to be mainly on the tradable goods side, with a greater prevalence of discounting for clothing and appliances in particular. Non-traded inflation was broadly as expected. Housing-related costs in particular continue to tick up, but aren't breaking out yet. It's these domestic costs which we expect to become more of an issue over the coming year as the Canterbury rebuild continues to build, while the factors pushing down tradable goods inflation - notably earlier rises in the NZ dollar - are likely to fade. That story remains on track."
Gordon said that financial markets seemed to react to the fact that annual inflation was outside the Reserve Bank's 1-3 per cent target range for a second quarter, with the NZ dollar falling 60pts to 0.8360 and the two-year swap rate down 3bps to 2.79 per cent.
"We view an OCR reduction as a risk scenario rather than a likelihood. The Reserve Bank's target is framed in terms of its inflation forecast, which will still be lingering close to 2 per cent on average after today's CPI data."
Statistics NZ also today announced the formation of a periodically convened advisory group to consider changes to the composition of the primary indicator of price movements, which is used by the Reserve Bank of New Zealand in setting monetary policy and the Official Cash Rate.
Some market participants have been calling for a move from quarterly to monthly inflation statistics, which the government agency has so far resisted on grounds that it is already under-resourced for the range of statistical series it compiles.
"Frequency of the CPI compilation will definitely be one of the issues and topics," Pike told this morning's media conference.
The nine member group will be chaired by the former Retirement Commissioner, Diana Crossan.
-nzherald.co.nz/BusinessDesk
