NZ Consumer Price Index falls 0.2% in Dec qtr; Annual inflation of 0.9% below RBNZ target band of 1-3%

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)

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FYI Westpac comments added. Westpac sticking with view that OCR will be hiked in September quarter. Markets still betting on rate cut in the next 12 months.  All keeps downwards pressure on fixed mortgage rates.

savers or saved?  I am a saver, I pay PAYE and save some. OAPs and retired's on the other hand are the saved.  ie they live off thier savings income.  There is a difference, as a saver with a mortgage I want a low OCR, I NET save on the debt and its tax free, so I am better off.
If you want more interest/income, put the money at risk, shares say....
Actually as a saved you should wish for deflation, your money gains value and its a tax free gain as well.
There is a saying, be careful what you wish for.

Why wouldn't you clear your mortgage first before saving? The returns on TD at the moment are poor.....

Yes thats the way and my main thrust, but I also save for emergencies / big ticket items.  So Im saving for a kitchen, new roof and deck at the moment.  Otherwise for the mortgage what I actually do is save up small sums, $1k-$2k and then pay it in to the mortgage as a lump.

Ivan......having been mortgage free for 23yrs I can agree 100% with you on interest rates. 
I can't believe the interest paid to banks these days, stunning amounts of money.
As for is as good as anything. Been saying that for 32 yrs . lol

You are halfway there by not having a mortage but "More interest from saving = more unearned income". 

In the last 4 years how often have the banks been on predicting rises? and in particular westpac?

Problem with rates is they have no relationship to supply or demand for credit. Credit is free and unlimited these days....practically.
Hence the gold talk among high reserve holding countries.
It's really difficult for folks that don't owe money. What do you money? Yeah I know...pretty sad.

now, now, bitchy because you are doing so well?.  If you see deflation as I do then fiat money is actually as sensible as anything and more than most. It has other advantages, eg its liquid, I can walk out and buy anything, anytime.  Like Ive said before if you really think metal and specifically gold as an end play then I'd argue lead is far more valuable. 
"Folks that dont owe money", well inflation is it seems 0.9%, so I fail to see why with a + NET effect its really difficult. Lets also not forget if you were in say japan you would be used to getting almost nothing in interest.
Really difficult is yet to come and raising rates is one sure way to make that come sooner.

Lead? Now you are sounding like those on zerohedge :-P

LOL, for me the two most important assets / wealth are, knowledge and being part of a community/society.
The first gives you capability, the second, opportunity to use it.
Ive long listened to the argument on gold and my biggest problem with it is you waste energy to get it, the energy is lost. What do you do with it? well ultimately you expend it to survive.
Therefore why not go straight to the survive bit if you think thats the way it will be  Listening to my grandparents and parents who lived through the Great Depression and war, popping the odd rabbit while on home guard duty made a huge difference. ditto growing their own food.  I think what  brought home the uselessness of gold to me was back in 2008 when japan was worried it couldnt buy rice as countries were stopping exports. It decided it was taking steps to increase growing food domestically (though i wonder on prk barrel politics).  Of course buying tools and capability doesnt satisfy some ppls greed....excuse me i have to go hug my makita.

I have been saying to friends for some time now to secure their food chain, which could include any or all of what you say. I think for the most part rural New Zealand will cope extremely well when depression kicks in. As my friendly milk supplier (farmer) says, you don't need money in the country.

Rural, yes, though no one works in isolation.

I am currently forcasting a rise in August.  I think the Kiwi will start to weaken from the  middle of the year and property prices will need to be reigned in. Rates will not go too high over the next couple of years due to China slow down in 2014.
On a separate issue about unemployed claimant benefits is down or welfare payouts reduced.  Like to point out that a tiny percentage would be because of new government initatives, but the bigest reduction is likely because you will find that possible 50% reduction in benefits of these numbers is due to those claimants moving to Australia to live and work.  Australia is helping NZ with reducing Social welfare.

I believe housing inflation is not included in the official inflation figures?
Which is tremendous because inflation control is the main remit of the RBNZ - and since inflation is low we can keep our record low interest rates for longer!

Though housing inflation isnt across the board?  also its a capital change and not an operating change.
The RBNZ also has a duty not to collapse the banking system due to its own ineptness.
NB Quite why cigarettes are in there by the look of it I dont know.

I believe the last few months reports have shown housing inflation to now be a countrywide 'phenomenon' rather than Auckland/Chchcentric

Yeah Right! - you need to be patient and not discount prices for maintenance/financial service costs and inflation. Graph courtesy of Colin Riden.

In fact I might call the broker right now and borrow another couple of hundred thou just for the hell of it - it's virtually free money!

Ah finally, something workable from SK. Given as you say, it is virtually free, then borrow more. Contact me once in hand, and this 'grey dullard' will help relieve you of it. Like you said, it does not matter if the market is high or low, just buy, buy, buy. So now you get to put your money where your mouth is...

Not his money though....when it goes pear shaped in steps moral hazard and mugs like me  (PAYE) have to pay or we wont have banks so wont be able to buy food.
Its times like this I wish we had debtors prisons.......

SK - I think youre right, house prices are'nt in the CPI calculation, but rents and building costs are. 

Noone wants to spend, except for my daughter who is taking off on her big OE to NY and ultimately London (hoping to find work...hmmm?). Just out of self-interest (hoping to pick greater and more travel savvy brains than mine!), you say Bernard that International airfares usually rise in the Dec. Quarter - so what are the best months to purchase cheap fares..Now-ish?
Cheers...anyone with an answer?