By Bernard Hickey
Statistics New Zealand has reported the Consumer Price Index (CPI) fell 0.2% in the December quarter, which was below the consensus economist forecast for a rise of about 0.1%.
Annual inflation of 0.9% in the year to the December quarter was below the Reserve Bank's target band for inflation of between 1-3% and below economists' forecasts of about 1.2%
Lower food prices and the strong New Zealand dollar's depressing effects on import prices more than offset higher cigarette prices because of tax increases and higher housing costs because of rising rents and house prices.
Financial markets interpreted this to mean the Reserve Bank was more likely to cut the Official Cash Rate (OCR) within the next year, although most economists expect the Reserve Bank to hold the OCR at its current record low of 2.5% until the end of this year or early next year. The New Zealand dollar immediately fell to 83.4 USc from 84 USc, given a lower OCR makes the New Zealand dollar relatively less attractive. Two year swap interest rates fell 3 basis points to 2.79%, keeping downward pressure on fixed mortgage rates.
"Annually, the CPI increased 0.9 percent in the year to the December 2012 quarter, due to increased prices for cigarettes and tobacco (up 13 percent), rentals for housing (up 2.4 percent), and electricity (up 5.2 percent)," Stats NZ said. "These movements were partly offset by decreases in the price of telecommunication services (down 5.7 percent), audio-visual equipment (down 17 percent), and fresh milk (down 9.5 percent)," it said.
Stats NZ said the CPI had fallen in four of the past five December quarters, apart from 2010 when the GST rate was increased. Food prices fell 1.8% in the quarter because of seasonally lower vegetable prices (down 16%), while household contents and services fell 1.8% and communication costs fell 2%.
"The fall for household contents and services was largely due to lower prices for furniture and furnishings (down 6.2 percent), 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," Stats NZ said.
Petrol prices fell 0.8% in the December quarter and are now 1.7% below their June 2012 quarter peak.
"Increases for housing and household utilities reflected higher prices for property maintenance services (up 2 %) due to seasonally lower government subsidies for insulation and heating), rentals for housing (up 0.3%), and purchase of newly built houses (up 0.5%), Stats NZ said.
Higher transport prices were influenced by a rise in international air fares (up 9.8%). This is the largest quarterly rise since the December 2009 quarter, when fares rose 14%.
"International air fares usually rise in December quarters. This quarter’s rise reflects seasonally higher fares to Asia, and higher fares to Australia after a dip in the September 2012 quarter," Stats NZ Prices Manager Chris Pike said.
Westpac's senior economist Michael Gordon said the implications of the slightly lower than expected number for the Reserve Bank were limited.
"Our view remains that the RBNZ will begin raising the OCR in September this year," Gordon said.
"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," he said.
(Adds detail, economist and market reaction)