Brian Fallow: The bright side of recession

Brian Fallow

If the recession has a silver lining it is that inflation has disappeared as an issue.

Economists expect it to stay out of the picture long enough for Reserve Bank Governor Alan Bollard to cut interest rates again on April 30 and reiterate that he expects them to remain low for an extended period. Most bank economists are picking a cut in the official cash rate to 2.5 per cent, from 3 per cent now.

The consumers price index rose 0.3 per cent over the first three months of the year, which brought the annual inflation rate down to 3 per cent from 3.4 per cent in December. It was bang on what economists had expected and represents a steep drop from the 5.1 per cent rate hit in September last year.

By the September quarter this year inflation is expected to drop, briefly, below 1 per cent - the bottom of the Reserve Bank's target range - as last year's spike in oil prices drops out of the numbers.

The CPI can be divided roughly equally between "tradables", whose prices are influenced by world prices and the exchange rate, and "non-tradables" whose influences are domestic.

Tradeable prices fell 0.4 per cent but that was entirely due to a normal seasonal drop in international airfares. Take that out and tradeable prices rose 0.3 per cent, a turnaround from a 2.1 per cent fall in the last three months of 2008.

Bank of New Zealand economist Stephen Toplis puts that down to the impact of the sharp drop in the kiwi dollar last year, which makes imported goods more expensive.

Car prices rose - new by 3.7 per cent and second hand by 3.5 per cent - despite extremely weak demand.

"Retailers can't keep discounting for ever," he said.

But ASB chief economist Nick Tuffley said the impact of a lower currency, which in any case has partially reversed in the past few weeks, would be transitory.

And he pointed to evidence that non-tradeable inflation is now weakening noticeably, including construction costs which have long been an inflationary hotspot. Non-tradeable inflation was 0.7 per cent in the quarter.

ANZ National Bank economist Philip Borkin said the 0.4 per cent increase in household energy prices - the smallest since 2005 - might be a sign that parts of the economy where competition is little or no constraint, might be heeding Dr Bollard's concerns about them and the "political reality of the economic situation".

Local body rates rose 0.7 per cent, below their average quarterly rise of 1.2 per cent since 2002.