Inflation headed for 15-year low

Petrol pump prices were down about 11 per cent in the March quarter and diesel down 17 per cent.
SUPPLIED

Petrol pump prices were down about 11 per cent in the March quarter and diesel down 17 per cent.

Falling fuel prices may see annual inflation drop to a new 15-year low in figures due out this week, economists say.

March quarter inflation may fall 0.2 per cent to 0.3 per cent, economists said, in figures due out on Monday.

As a result, the annual inflation rate may be barely above zero for the year to March, perhaps just 0.2 per cent for the year.

That will set the scene for official interest rates to stay on hold for an extended period, economists said.

Financial market pricing still suggests a cut is expected for official interest rates, but ANZ economists said the hurdle for the Reserve Bank remained high and rates were expected to stay on hold.

Deutsche Bank said it expected annual inflation to be about 0.3 per cent for the March year, which reduced the chances of the Reserve Bank cutting rates, especially in light of still strong business confidence and high house prices.

Annual inflation in 2014 was 0.8 per cent, so if it dropped to just 0.2 per cent for the year, it would be the lowest pace since 1999.

Inflation is down because of cheaper petrol prices, even as the economy is growing rapidly. 

Shop prices generally are also showing little increase, with ANZ economists expecting lower prices for clothes and household goods because of the usual discounts at this time of year.

But food prices were up 0.9 per cent in the March quarter, because of a spike in fruit and vegetable prices in January, though that was expected to unwind in coming months, ANZ said.

Ad Feedback

This week's inflation figures are also expected to show rising prices in the housing sector and government charges.

House building costs may be up about 6 per cent a year.

But the key inflation factor is fuel.

Westpac said it estimated that petrol pump prices were down 11 per cent in the March quarter and diesel down 17 per cent.

That would see a 0.6 percentage points fall in annual inflation- accounting for all of the drop from last year's 0.8 per cent annual rate.

Wider inflation is likely to remain subdued too with low wage growth and a still high New Zealand dollar keeping a lid on import prices. The dollar was down against the US currency, but remains high against the Australian dollar and the euro, keeping prices down.

Westpac senior economist Michael Gordon said there would also be the impact of a 10 per cent lift in tobacco excise duty, higher education fees, and a seasonal lift in food prices in the March quarter.

But overseas airfares and package holidays were expected to fall, as they typically do at the time of year.

The Reserve Bank would not react to a one-off fall in fuel prices, but is worried about low inflation becoming "embedded" in wages and price setting, making it harder to return to the 2 per cent target, Gordon said.

 - Stuff

Ad Feedback
special offers
Ad Feedback