Tracking the Trends

Friday 26th January 2001

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Consumer price index
Annual per cent change

Source: Statistics New Zealand

Economy wide: average selling prices
Net per cent change

Source: NZIER

Bad start to the real millennium

The consumer price index rose 4.0% in the year 2000. This is the first time inflation has exceeded the 3% upper limit of the Reserve Bank's target band.

The bad news for the Reserve Bank is that inflation is no longer contained to a couple of distinct areas. In the year to September, consumer prices rose 3.0%. But if tobacco and petrol prices are set to one side, other prices rose only 1.3%. But in the December quarter the 1.2% increase in prices cannot be blamed on a change in tax or on the machinations of a Middle Eastern oil cartel. Indeed, the price of petrol fell slightly in the quarter.

Most goods now more expensive

Most goods in the CPI were more expensive in December. 63.7% of the items in the CPI rose in price in the quarter.

The largest contributions to the price rise came from the prices of international airfares, new dwelling construction and fruit and vegetables.

International air travel cost 5.6% more in December than September. This could have been driven by seasonal factors. The peak season traditionally begins in the fourth quarter.

The cost of getting 5+ a day has risen 14.0% in the past 12 months. This is the largest annual increase in the price of fruit and vegetables since June 1995.

Building and furnishing a home became more expensive in the December quarter. Construction costs were 0.9% higher than in September, while the prices of furniture and floor coverings rose 4.5%.

Builders who responded to NZIER's Quarterly Survey of Business Opinion confirmed they increased their prices in December. And importantly from a monetary policy perspective, they expect to do so again in March. This may be a response to the continuing decline in profitability builders experienced in December.

The policy response

The Reserve Bank is in a tricky position again. With the US economy slowing, we argued in this column last week that the Reserve Bank has more room to manoeuvre interest rates on the downside, as slowing export demand eases pressure on businesses' capacity and prices. While this remains the case, other sources of pressure on prices are building.

Firms have seen their margins squeezed over the past year. Input prices have been rising faster than output prices since December 1999. And the recent blowout in the producers' price index, with input prices increasing 8.0% in the year to September 2000, would be enough to scare any central banker.

The Quarterly Survey of Business Opinion, which was released this week, showed firms' profitability continued to decline in December. In the face of this while expecting costs to rise again in March, firms signalled price rises again this quarter.

Wages may also start to put pressure on prices if employees demand compensation in line with the CPI increase. The only way for firms to pay their employees more would be to put up prices, and thus a vicious circle would begin.

So, while the Reserve Bank will not want to put up the interest rate as the global economy cools and domestic demand is only starting to revive, there are risks. Their current strategy, described on Wednesday when the official cash rate was reviewed, is to wait until additional data reveals more of the picture.

Compiled by Vhari McWha

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