Inflation has hit a 13-year low of just 0.8 per cent in the year to September 30, according to Statistics New Zealand figures, reflecting a high New Zealand dollar and a slack domestic economy.
Westpac Bank economists said the unexpectedly low inflation rate reflected a couple of quirks in the figures meaning an interest rate cut by the Reserve Bank as a result remained a ''risk scenario rather than a likelihood''.
But the Green Party immediately said inflation was below the Reserve Bank's target band and that gave the central bank scope to cut official interest rates from 2.5 per cent later this month.
A lower cash rate was likely to lead to lower domestic interest rates which, in turn, would take pressure off New Zealand's overvalued exchange rate, helping exporters and manufacturers who compete with imports, the Greens said.
"Low inflation gives the Reserve Bank generous scope to cut the OCR as a first step to addressing our overvalued currency," said Green Party co-leader Dr Russel Norman.
The New Zealand dollar dipped after the inflation figures came out, falling from almost US81.80c to recently trade just under US81.60c.
Most economists had expected inflation to be 1 per cent for the year, the same as for the year to June, though some tipped a rate of 0.9 per cent. The 0.8 per cent rate was slightly lower than most expected, taking inflation down to levels last seen in 1999.
Annual inflation is extremely low in part because of slumping electronics prices, with audio-visual gear down a massive 18 per cent in the past year, while milk is down more than 9 per cent on a year ago and phone service costs are also down sharply.
Westpac pointed out that September quarterly inflation of 0.3 per cent was low in part due to quirks that were not likely to be repeated - a 2.8 per cent drop in second hand car prices and a near 8 per cent fall in domestic air fares.
In contrast the cost of house building rose 3 per cent in the past year and 1 per cent in the quarter. But the annual rise in building costs in Canterbury was almost 10 per cent.
''Our concern is that the Canterbury rebuild will boost housing-related inflation, eventually forcing the Reserve Bank to increase the OCR. This story still looks very much on track,'' Westpac said.
The Reserve Bank's target band for inflation is 1 per cent to 3 per cent, so a low inflation rate adds to the case for the central bank to consider cutting rates.
Inflation has been low for the past year, in part because of the high New Zealand dollar holding down import prices. A subdued local economy has also meant retailers have had little scope to push up prices, keeping a lid on things like clothing and household appliance prices.
However, economists say the rebuilding work in Canterbury after the big earthquake will put pressure on construction costs to rise, and that could flow through to wider inflation pressures around the country.
While inflation is at 13-year lows, economists expected annual inflation to drift back up to more than 2 per cent by late next year.
Meanwhile, the latest September quarter increase in inflation was 0.3 per cent, the same as the quarterly increase of 0.3 per cent in the June quarter.
Inflation was boosted in the September quarter by higher local government rates, rents and housing insurance. There was also the usual seasonal rise in fruit and vegetable prices. Prices fell for second hand cars, there was a big drop in domestic air fares, and milk prices also fell in the three months.
''The increase in the CPI reflects higher housing-related prices and seasonally higher vegetable prices. These increases were countered by cheaper transport, telecommunication services, and fresh milk,'' Statistics NZ prices manager Chris Pike said.
Prices for housing and household utilities rose 0.8 per cent, reflecting higher local authority rates (up 3.6 per cent), rentals for housing (up 0.6 per cent), and purchase of new housing (up 1.0 per cent). House insurance (up 17 per cent) also rose.
Vegetable prices rose 20 per cent in the September 2012 quarter. This reflects seasonal price rises for tomatoes (up 57 per cent), lettuce, capsicums, and broccoli. However, in the year to the September 2012 quarter, vegetable prices were down 3.3 per cent.
In the September 2012 quarter, prices were lower for second-hand cars (down 2.8 per cent), domestic air fares (down 7.8 per cent), petrol (down 1.0 per cent), telecommunication services (down 1.8 per cent), and milk (down 3.8 per cent). On average, petrol prices were lower than in the June quarter, despite peaking in the last week of August.
The CPI increased 0.8 per cent in the year to the September 2012 quarter, which is the smallest annual movement since a 0.5 per cent increase in the year to the December 1999 quarter. Prices rose for cigarettes and tobacco (up 13 per cent, reflecting a 14.49 per cent rise in excise duty in January), rentals for housing (up 2.4 per cent), and electricity (up 4.4 per cent).
Prices were lower for telecommunication services (down 7.5 per cent), audio-visual equipment (down 18 per cent), and fresh milk (down 9.3 per cent).
- © Fairfax NZ News
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