A 0.2 per cent fall in the December quarter Consumers Price Index (CPI) is seen giving the Reserve Bank breathing space as it decides when to start raising interest rates.
The quarterly decline took the annual rate of inflation to 2 per cent, from 1.7 per cent in the September quarter which was the lowest level in more than five years.
Publishing the data today, Statistics New Zealand (SNZ) said the main factor in the December quarter CPI decline was a 2.4 per cent fall in food prices, with vegetable prices down 17.6 per cent.
On the other side of the scales, transport prices rose 1.5 per cent in the quarter, with international air transport up 13.9 per cent, its largest increase since the series started in 1981, and second-hand cars up 1.6 per cent.
Clothing and footwear prices rose 1.8 per cent in the latest quarter, with summer seasonal clothing up about 10 per cent. Audio-visual equipment prices fell 9 per cent in the December quarter.
Economists pointed to the significance of a rise of just 0.1 per cent in the non-tradable component - goods and services that face no foreign competition - of the CPI in the December quarter, following a 1 per cent rise in the September quarter.
The tradable component - goods or services imported or in competition with foreign goods - fell 0.5 per cent in the December quarter, having risen 1.6 per cent in the previous three months.
ASB economists said the smaller than expected rise in non-tradable inflation suggested capacity pressures were subdued towards the end of last year.
"In particular, inflation in the housing and utilities group appears to be contained for now despite the recent rebound in housing market activity."
The result should provide some comfort to the Reserve Bank, given that it had noted concern at the lack of disinflation in the non-tradable sector during the recession, the ASB economists said.
They pointed out that construction costs rose just 0.4 per cent in the December quarter, but also warned that a rebound in pricing intentions in the building sector in late 2009 suggested the potential for some strong rises in coming quarters.
With the housing impact on inflation remaining muted for now, it was comfortably offsetting more stubborn inflation in labour-intensive services, ASB said.
"The key implication for the RBNZ is that near-term inflation is benign enough to keep the RBNZ comfortable in the short term."
The ASB economists expected next week's Official Cash Rate (OCR) review to show little extra urgency in the Reserve Bank's tone, with its assessment of hiking rates around the middle of 2010 remaining in place, effectively ruling out a March hike.
They continued to expect the Reserve Bank would hike in April by 50 basis points.
Goldman Sachs JBWere analyst Philip Borkin said that while some uncertainties remained surrounding the inflation outlook, particularly relating to the potential growth rate of the economy, he expected inflation to remain within the Reserve Bank's 1-3 per cent band for the foreseeable future.
That was largely based on the belief of a subdued labour market backdrop.
"Today's numbers provide the RBNZ with breathing space," said Borkin.
"While recent gauges of resource pressures have shown a tightening - which is consistent with the need to withdraw monetary policy support eventually - we feel they have time on their side."
He remained comfortable with a June start to the tightening cycle.
Borkin also said the fall in food prices was a lagged response to lower global commodity prices in the early part of 2009, a dynamic that may be coming to an end as global soft commodity prices began to rise.
TD Securities senior strategist Annette Beacher said that at face value today's figures supported a consensus call for the Reserve Bank to start tightening from June.
But TD Securities' call for a 25-basis point rise in March was based on the outlook for inflation, she said.
"As the economy has clearly emerged from recession, prices are expected to build."
Capacity utilisation had surged, house price inflation was approaching a double-digit pace, and inflationary expectations were starting to rise.
- NZPA
