Statistics NZ reports Consumer Price Index fell 0.2% in Dec qtr from Sept qtr; inflation in year to Dec qtr 0.8%; touch below forecasts

Statistics NZ reports Consumer Price Index fell 0.2% in Dec qtr from Sept qtr; inflation in year to Dec qtr 0.8%; touch below forecasts

By Bernard Hickey

Prices fell in the December quarter for the first time in two years and there are few signs of inflationary pressure building that would force the Reserve Bank to hike interest rates again anytime soon.

Some economists are now wondering if stucturally lower inflation could allow the Reserve Bank to hold the Official Cash Rate until well into 2016 now that annual inflation is below the bank's target.

Statistics New Zealand has reported the Consumer Price Index (CPI) fell 0.2% in the December quarter and annual inflation fell to 0.8%, which is below the Reserve Bank's 1-3% target and slightly below most economists' forecasts.

The consensus of economist forecasts was for a 0.1% fall for the quarter and annual inflation of 0.9%. The Reserve Bank forecast in its December quarter Monetary Policy Statement that inflation in the quarter would be 0.1% and annual inflation would be 1.0%.

Economists have been delaying their forecasts for the next Reserve Bank rate rise until into either 2015 or 2016 in recent weeks because increased signs of deflationary pressures as the European and Chinese economies slow and oil prices slump. Fixed mortgage rates have fallen in recent months in line with inflation expectations and bond yields in financial markets.

Prices for petrol, vegetables and telecommunciations fell during the quarter, while the price of newly built houses and domestic airfares rose, Statistics NZ said.

The New Zealand dollar immediately dropped around 30 basis points to 76.4 USc and two year swap interest rates fell 2 basis points.

For the year, cigarette and tobacco prices rose 11.9% because of an excise increase in January, while the cost of newly built homes rose 5.4% and electricity prices rose 3.6% for the year.

Petrol prices fell 4% for the year, audio visual and computing equipment costs fell 14% and alcoholic beverages costs fell 2.4%.

Without the rise in power prices and tobacco taxes, annual inflation would have been 0.35%.

Statistics New Zealand said that if petrol prices were to stay at their mid January levels of below NZ$1.86/litre for the rest of the March quarter then petrol prices would subtract 0.8% from the March quarter Consumer Price Index.

Tradable inflation fell 0.8% for the quarter and non-tradable inflation rose 0.3%.


ANZ Senior Economist Mark Smith there were few signs of increasing capacity pressures filtering through to consumer prices.

"Lower fuel prices are likely to keep annual inflation low over 2015, but a more enduring shift looks to be underway in the evolution of inflationary pressure," Smith said.

"In short, there is no need to move the OCR higher on the inflation outlook, and we expect the RBNZ to remain on hold for a considerable period," he said. ANZ has forecast a flat OCR until late 2016.

Westpac Chief Economist Dominick Stephens said annual inflation being below 1% would make the Reserve Bank nervous, particularly given the recent sharp fall in petrol prices would take inflation to just above zero.

"Nil inflation will torpedo any lingering notion of the RBNZ hiking the OCR in the near term, and could even cause financial markets to begin assessing the risk of OCR cuts," Stephens said, noting however that the Reserve Bank was likely to argue the inflation dip was transitory and that OCR cuts would therefore be inappropriate.

"However, the RBNZ's desire to signal an eventual increase in interest rates must surely have dwindled as inflation has fallen and the exchange rate has strengthened," he said.

"Our current forecast is for no OCR hike until March 2016, but the risks are shaping up in the direction of an even later date for hikes."

ASB changes view

ASB Senior Economist Jane Turner said she still expected non-tradable inflation to pick up over the year ahead as the economy continued growing faster than 3%, but it was clear there was no evidence yet of a broad-based rise in pricing pressures.

"Given how long inflation has been low, we judge it is increasingly unlikely that the RBNZ will lift the OCR in 2015," Turner said.

"Increasingly, the case for a higher OCR is about if, not when, rates go up. We think the balance has tipped to the OCR remaining on hold over the next couple of years and we have changed our OCR view to now expect no OCR increases for the foreseeable future," she said.

(Updated with more details, chart, reaction)

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Inflation rates of our biggest trade partners:
Japan 2.4%
Australia 2.3% (Dec14 figure due 28 Jan)
China 1.5%
US 0.8%
South Korea 0.8%
UK 0.5%
Euro Area -0.2%

The tradeable section in that chart is pretty sad. Is this country going to run on houses, rates and electricty costs?

Yes indeed, the local vendors of just about anything just can't keep their hands out of our wallets.

On the topic of Autarky 
Its worth remembering that while we Kiwi's think we can march to the beat of our own drum , we dont live in a state of Autarky .
Simply we cannot function without partaking in international trade , and we are 100% exposed to the ravages of world markets , and it impacts everything from filling your tank to the dairy farmers payouts and the impact on provincial New Zealand  , deflation in Japan or Europe or any other malaise overseas has some impact , immediate or delayed .
Simply , we live in an intergrated world , and what happens elsewhere matters .... a lot

Very true. The trouble is this government has ignored all the problems associated with export businesses - forget slower world markets as we can't change them. There are many steps (many published on this site) that would help, such as reducing/influencing the x-rate, so companies make more profit.

Sad, or maybe a better description would be sick.
If you look at that as -1.4% then if the OCR can impact that in a positive way then the OCR should be moved to do so.

The CPI result should have been expected !!!
Much of the cream in any business will be the reduced fuel costs affecting pricing across the board......
Government services etc should also be able to be slightly cheaper due to reduction in fuel costs........Bill E might be able to balance his budget.....especially if he steps on the toes of the rough shod villains..sorry meant public sector heroes running the show.

As someone said, in a Big Mac a temp drop in the price of the cheese slice isnt going to make mouch of a difference to the price of the burger overall.
A drop in CPI due to lower fuel price was indeed expected.  Grant A I think said 0.8% so appears to be spot on.
Of course less cost of petrol but also less duty and GST collected? NET result might acually be worse for the Govn if its losing income across the baord but saving a little in a few spots.

Steven -  I wouldn't have expected many NZ businesses to have adjusted their charge out prices to a lower figure.....Couriers, Taxis, Freight/cartage companies etc haven't changed their pricing that I have noticed. So technically their fuel costs have gone down but their charge out is the same......income will approximately be the same with costs lower (all other things aside) means more GST collected and paid.
E.g.. Income $100 + 15% = $15.00 GST collected....Then deduct costs of $80 + GST at 15% = $12.00 GST paid to other parties you incurred the cost too. Total GST payable = $3.00......Now the price of fuel has reduced.....BUT......Your Income stays the same as your charge out rate hasn't altered....GST you have charged = $15. But your costs have dropped to e.g $75 + GST at 15% = $11.25......the difference in GST $0.75 so the Govt earns an extra .75 cents off the simple $100 transaction.
The GST collected would only change if the business lowers its charge out prices.....the likelyhood of that happening at the current time is nill.....cut throat competition will only happen if the market is over-supplied somewhere.

If you are spending $5 bucks less on petrol, your GST payment may go up 75 cents, but the petrol station gets $5 less so they collect a corresponding 75 cents less in GST.
But then their costs of gone down and their margin has gone up, so you rinse and repeat, but eventually you get to the end of the chain, the importer. The value of their imports has gone down and so they pay less GST to the govt.
Doesn't it all net out to nothing in the end?

Not just that but there is a hedging effect to account for as well.

So the price of fuel dropped.  If we strongly suspect it is going up again.

So first of all there is all the price raises that we have being wearing and not passing on.  A drop in price might only bring us back towards proper margin.

Even if it gets to proper margin, AND pays for any old stocks (petrol stations get directly affected, but everyone has a delay for anything made or having invoice period with  the old petrol rates in it.)

THEN we start building a buffer, because we suspect the price is going up again, so the longer we can build a war chest at the existing rate, the longer we can hold off putting up prices (and driving off cost sensitive customers) when the prices come back up.

To notice a drop it takes a while for things to work their way through.

Now watch the economic apologists come out and explain that although the RBNZ hiking and tightening bias is speeding up deflationary forces, that NZ still can expect rates to rise. 

So the Tradeables is negative again, surely the rise in OCR is too blame to some degree, but it seems that un-important sector is being left to sink. If they drown and nose dive for the bottom we will be in a bad, bad way.

If the price of a new house goes up 5.4%, then obviously the price of an existing house is not going to fall. How much of the 5.4% is council charges or new building code requirements?
Rates and electricity are monopolies based on cost plus based on the return required to replace the assets, and maintain the huge administration cost that is now replicated across all generators and lines companies.

How about some wage rises.  That would counter deflationary pressures and make houses more affordable?
How about less or no immigration.  That would put upward pressure on wages and resist property price increases.
It  seems to me that the government would almost rather destroy the ecconomy than meaningfully address house affordability and rebalance the ecconomy.

Just wait for the tax take to collapse and the government forced to either borrow or cut spending, its already on its way in the provinces

RNZ  (URL pasting not working on tablets on ""There really isn't an inflation problem ...We've got other problems, like the high dollar and very uneven economic growth that are much more important to address than inflation at the moment,"

Statistics New Zealand said that if petrol prices were to stay at their mid January levels of below NZ$1.86/litre for the rest of the March quarter then petrol prices would subtract 0.8% from the March quarter Consumer Price Index.
So, given inflation currently at 0.8%, then all else being equal, we are looking very close to zero in the March year. That is a very big miss from the target of 2%. While the RBNZ may look through short term effects of oil prices, those oil prices look like being here for a while. Arguably the RBNZ also should look through tobacco increases, and even electricity price increases, given they are government controlled.
I'm not sure inflation should be the only target, but Bill English was determined it should be at the last PTA agreement. Time for him to change tune probably, and for an important debate on what key monetary targets should be. Otherwise he should be sending rude letters to Mr Wheeler.
Impact on exporting/ trading businesses and the current account would be high on my list, given the currency wars going on

Well said, yet the RBNZ just won an award for doing pretty much nothing expect following standard dogma.
The RB act needs a big review with different targets and levers - not likely for the next 3 years unfortuntaekly.

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