Inflation evaporates in oil's plunge, economic slump

Friday 16th January 2009

New Zealand consumer prices probably fell for the first time in two years in the fourth quarter, reflecting the slide in the price of crude oil and the impact of a shrinking economy.

The consumer price index probably fell 0.4% in the final three months of 2008, swinging from an 18-year high of 5.1% in the third quarter, according to a Reuters survey. The annual rate probably eased back to 3.4% and is expected to slip back within the central bank's 1% to 3% range this year, giving Governor Alan Bollard the confidence to cut the official cash rate 100 basis points to 4% on January 29.

"The spike in inflation to 5.1% is set to vanish more swiftly that it arrived," said Nick Tuffley, chief economist at ASB. "The annual inflation rate will bounce between sub 1% and 3% over 2009 before settling comfortably below the target ceiling in 2010."

Companies are the gloomiest about their own prospects since at least 1970, according to the Quarterly Survey of Business Opinion for the fourth quarter. A net 3% of firms plan to reduce prices in the next three months, the first net decline since December 1998. Tuffley estimates petrol prices tumbled 22% last quarter and will slide further in the first three months of 2009.

The global economic slump has driven up stockpiles of crude oil and weighed on prices even as members of the OPEC cartel trim production to put a floor on the price slide. Crude oil for February delivery fell 0.8% to US$35.13 a barrel on the New York Mercantile Exchange. The price of oil has tumbled 62% in the past 12 months.

Declining fuel costs probably overwhelmed the impact of higher food prices in the final three months of 2008.

So-called non-tradeables inflation probably remained stubbornly high at 0.9% in the fourth quarter for an annual rate of 4.3%, marginally below the central bank's 4.4% forecast in its December Monetary Policy Statement.

Statistics New Zealand releases the CPI report January 20.

By Jonathan Underhill

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