Weight of fuel to subdue CPI

The Consumers' price index for the September quarter is expected to confirm that the inflation genie remains well outside the bottle, but lower fuel prices will go a long way to help subdue it, economists say.

Changes to the way the CPI is put together mean fuel costs will have a bigger weighting on the index, accentuating the impact of the recent sharp drop in the price of oil. The full impact of those two factors should be felt in the December quarter.

Annual inflation has been outside the Reserve Bank's 1 to 3 per cent target range for the past four quarters.

Westpac Institutional Bank economists expect the October 25 release to show a 0.9 per cent gain in the CPI over the September quarter, a rise of 3.7 per cent for the year to September. But the bank expects no change in the index over the December quarter, which would bring the annual number to 3 per cent.

Fuel prices have risen sharply over the past three years, making for persistent inflationary pressure.

At the same time, the Reserve Bank's ability to control inflation through interest rates has been compromised because of the popularity of fixed rate mortgages. That too will soon change, Westpac economist Doug Steel said. "More than 80 per cent of mortgages are fixed so it takes a while for those to roll off and we know that there is a big bulge of them rolling off in the next couple of months."

Goldman Sachs JB Were economist Shamubeel Eaqub expects a 0.7 per cent gain in the CPI over the September quarter, or 3.5 per cent over the year.

"If petrol prices stay where they are... then you are looking at a substantial decline in the December quarter," he said.

- HERALD ON SUNDAY