OPINION: While bears stalk the global economic woods, New Zealand is enjoying Goldilocks inflation - not too hot, not too cold.

At 1 per cent, annual inflation is touching the bottom of the Reserve Bank's target band - good news for consumers and savers.

Just a modest pay rise, say, 2 per cent, means people are slightly better off than a year ago.

The strong currency is giving everyone an effective pay rise by keeping living costs down. Imports are cheaper, with items like televisions and stereos down a massive 19 per cent in the past year, while phones are down 28 per cent.

The other factor keeping prices down in the shops is a simple lack of demand. In tough times Kiwis have full-price phobia. Don't buy unless you get a bargain. That means retailers need to offer deals to get sales through the door.

And for savers the low inflation picture is good, too.

High inflation can erode the value of savings in the bank when interest rates are low, but now term deposits on a decent sum can earn 4 per cent or so, a good margin above inflation. It is the after-tax and after-inflation returns that really matter.

Low inflation is also an important signal for borrowers. It means the Reserve Bank is likely to keep the official cash rate lower for longer and hence floating mortgage rates should remain cheap well into next year.

While inflation in the past year has been low, it could go even lower, just under 1 per cent in the September year.

So is there a risk of “deflation” - generally falling prices?

While that might sound like a good thing for consumers, deflation can be nasty. People put off buying things, waiting for prices to fall even further. The same applies to business investment, and banks sit on their cash and the economy grinds down.

Japan has been through 20 years of low growth and falling prices and it can make debts unbearable. Deflation is no fun.

But New Zealand should avoid that deflation bear trap. We have a floating currency, so if things turn sour, the dollar will drop and import prices will rise.

Inflation in New Zealand is also likely to be near a trough, with the economy gradually picking up and the Canterbury rebuild slowly getting under way.

So the Reserve Bank is not expected to cut rates in fear of deflation.

- © Fairfax NZ News

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