Inflation on the run

Inflation is likely to hit its lowest level in nearly two years - if not longer - when official figures are released next Thursday.

Economists are expecting on average that the Consumers Price Index will have risen by 0.5 percent in the three months to June, giving an annual inflation rate of 1.8 percent. As at March the rate was 3 percent.

The last time the annual rate was 1.8 percent was September 2007 and for the last time it was lower than that you need to go back to 2004.

The Reserve Bank of New Zealand is charged with keeping inflation within a 1 percent to 3 percent range - however, prices haven't been contained within that range very often at all in recent years.

As recently as September last year the annual rate of inflation had blown out to 5.1 percent. But since then it has fallen sharply as lagging consumer demand and the recessionary environment put the squeeze on the price of goods and services.

And there is more to come.

Economists believe that the inflation rate may actually briefly fall below the 1 percent to 3 percent range as of the September quarter and that the rate will stay well within the targeted range for the foreseeable future.

Domestically-sourced, or "non-tradable" inflation - which is the most-watched statistic - could be at its lowest level in about eight years, ANZ National Bank economist Philip Borkin believes.

"We are expecting a 0.3 percent increase in non-tradable inflation," he said. "...Services linked inflation is also likely to be subdued given the weakness now present in the labour market."

However, the particularly volatile "tradable" inflation rate - which includes imported goods and services and can therefore be adversely affected by things such as a big spike in world oil prices - is also expected to be subdued.

As a result of the outlook for inflation being so benign, economists are picking that interest rates will also stay low for an extended period.

The Reserve Bank has taken the axe to the Official Cash Rate in the past year, dropping it to 2.5 percent from 8.25 percent in response to an economy that has been in recession since the start of 2008.

ANZ National's Borkin said that around the central banks are alluding to the challenges that excess liquidity in markets will present to the longer-term inflation picture.

"At present we consider this a risk as opposed to reality and are equally mindful of deflationary forces in the short term," he said.

"Going forward, we see the combination of excess capacity, constraints n the supply of credit and increasing use of regulation as meaning the inflationary impetus from excess liquidity will be constrained."

- © Fairfax NZ News