Inflation low, but so is the growth rate

ANDY JACKSON/ Fairfax NZ

SEASONAL FLUCTUATIONS: A shortage last month saw a 74 per cent rise in price of pumpkins, but most fruit and veges dropped, according to the food price index.

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The New Zealand economy has a case of the grumps, ANZ says, with data out yesterday pointing to depressed inflation, a sulky labour market and indifferent consumer confidence.

A shock 0.3 per cent drop in inflation for the December quarter, which put annual inflation at a much weaker than expected 1.8 per cent, signals flagging growth and means mortgage interest rates are likely to remain at near record lows for longer.

ANZ reported a 2.3 per cent drop in job advertisements in December, confirming a four-month trend of cooling in the labour market.

And in a third blow, the ANZ-Roy Morgan consumer confidence survey for January revealed consumer sentiment was flat. A strong lift from 108.4 points in December to 116.1 points was put down solely to seasonal factors rather than a genuine improvement in sentiment.

The fall in quarterly inflation is the first since the December 2009 quarter and the largest drop since the December 2008 quarter.

The drop in prices for the December quarter was largely due to a one-off fall in vegetable prices, but the strong New Zealand dollar and cautious consumers are also being blamed for weak inflation.

ANZ chief economist Cameron Bagrie said the result indicated "there's not a lot of demand pressure out there ... people are having to fight aggressively to move goods".

The Reserve Bank could put up its feet, he said. "To think interest rates are going up any time soon is just ridiculous. They are not going anywhere."

The triple whammy of negative data reflected a scratchy and confused economy, Bagrie said.

Positive factors such as strong commodity prices were currently being overshadowed by a barrage of negative "shocks" and looming largest was the threat posed by economic ructions in Europe.

"It's not completely one-way traffic, but it's enough to keep people pretty circumspect. New Zealand is going through a multi-year period of very grumpy growth and right here and now it's a little more grumpy than usual."

Economists had picked annual inflation for the year till December of between 2.2 and 2.4 per cent.

The 1.8 per cent increase was a significant drop compared with the 4.6 per cent lift for the year till September, but that included the impact of the GST hike in October 2010. When the GST impact is removed, inflation for the year till September was 2.3 per cent.

ASB said it still expected the Reserve Bank to leave interest rates unchanged for the rest of the year, but it could delay the first move until next year if the Christchurch rebuild – expected to be a fillip for the economy – was not under way by June.

The inflation data prompted the Manufacturers and Exporters Association to call for a cut to the official cash rate next week to lower the exchange rate.

But ANZ economists said though the low rate of inflation gave the Reserve Bank flexibility to cut interest rates "should the global outlook worsen", the hurdle to do so was high, despite signs of a slowing economic recovery.

The Council of Trade Unions warned that wages would need to rise, even if inflation hadn't, since wages had not caught up with increases in the cost of living and higher GST last year.

- © Fairfax NZ News