Fuel price depresses headline inflation
Falling petrol prices driven by a sharp fall in the cost of oil are expected to cause this week's December inflation figures to be flat.
And economists say the consumer price index (CPI), due Wednesday, will probably show annual inflation slightly below the Reserve Bank's target band of 1 to 3 per cent.
But the real impact of falling petrol and diesel prices, which have both dropped more than 40 cents a litre since October, is expected to be a "much more dramatic" impact on inflation for this year.
Economists expect subdued December quarter inflation data this week to drop annual inflation figures below 1 per cent for just the second time in the last few years.
Westpac economist Michael Gordon said lower fuel and food prices would be balanced out by higher airfares and housing-related price rises.
But while the recent plunge in oil prices would have a small impact on December's CPI data, it was expected to cement the "low-inflation story" for 2015.
"The real fireworks will come in the March quarter," Gordon said.
"Based on current fuel prices, annual inflation could come very close to zero in the early part of this year."
Since October, petrol prices have dropped 49c a litre, while diesel has fallen 45c, following a record run of consecutive cuts at the pump.
The spot price for Brent crude oil has dropped more than 55 per cent, to US$48 (NZ$61.20) a barrel.
Gordon said the biggest uncertainty in its forecast concerned airfares and package holidays, which had an "unusually large" increase during the December 2013 quarter.
"We're assuming that this wasn't repeated to the same degree in 2014, and is the main reason why we expect the annual inflation rate to recede slightly."
HSBC chief economist for Australia and New Zealand Paul Bloxham said the recent fall in oil prices had caused its December annual CPI expectations to fall from 1.3 per cent to 1 per cent.
Lower petrol prices were considered a risk for local growth prospects and would give the Reserve Bank greater scope to maintain interest rates at 3.5 per cent for longer, he said.
Inflation during 2015 was also expected to be lower as a result, to 1 per cent from 1.8 per cent.
"Given that petrol accounts for 5 per cent of the New Zealand consumer's basket, this is expected to knock 0.5 to 0.8 percentage points off the headline CPI," Bloxham said.
"We continue to expect domestically produced inflation to climb through the year, as above trend GDP [gross domestic product] growth and a tightening labour market lift wages growth and local costs."
HSBC had pushed out a Reserve Bank hike to interest rates to the fourth quarter of this year, from a previously expected rise in the third quarter.
ASB economist Christina Leung said the influence of lower petrol prices would show a flat outcome in December's inflation figures, but would be more pronounced this year.
The drop in petrol prices would take 0.3 per centage points of the fourth quarter CPI, she said, and would be bigger in the first quarter of 2015.
"We assume crude oil prices will remain low over much of 2015, which results in a low headline inflation outlook for 2015.
"We now expect headline inflation will remain below the Reserve Bank's inflation target band of 1 to 3 per cent over much of 2015."
Leung said lower petrol prices would act like a tax cut for households, but the Reserve Bank would be interested in whether it flowed through broader prices and wages in the economy.
Regardless, ASB expected the official cash rate (OCR) to hold at 3.5 per cent until at least December.
Recently, BNZ economists pushed back expectations of an official cash rate hike until March 2016, with deflation looming as oil prices continue to fall.
Head of research Stephen Toplis said plummeting oil prices were causing the BNZ team to revise its short-term CPI forecasts "by the day".