Inflation quickens to 5.1% on food and fuel prices

Tuesday 21st October 2008

New Zealand's annual inflation accelerated to an 18-year high of 5.1% in the third quarter, a level the central bank predicts will be the high-water mark in an economy that has been shrinking this year.

Consumer prices rose 1.5% in the third quarter, matching economists' expectations, according to Statistics New Zealand. Food, housing and transport prices may the biggest contribution to inflation in the latest three months, with nine of 11 CPI groups recording an increase.

New Zealand's dollar was little changed after the report at about 62 US cents and has dropped almost 8% this month amid expectations inflation will abate next year, allowing the central bank to cut interest rates this week. The NZX 50 Index has sunk more than 40% this year as a weakening economy curbed companies' ability to pass on rising costs to customers, eroding their profit margin.

"The Reserve Bank can't ignore the number entirely because that's its job and the highest rate since 1990 is not a good look," said Robin Clements, senior economist at UBS New Zealand. "But I do think it is old news," he said. "Petrol has already gone down and in the medium term that will undo a lot of the increase we've seen over the last year or so."

Clements predicts Reserve Bank Governor Alan Bollard will reduce the official cash rate by 100 basis points to 6.5% on Thursday, the biggest reduction since the OCR was introduced in March 1999. Given the market is pricing in a cut of that size, the risk is that Bollard decides to stage the reduction in smaller steps, Clements said.

The economy shrank 0.2% in the second quarter after a 0.3% percent contract in the first. Some economists expect the will stay in recession through to the end of 2008.

House prices fell 6.1% last month from a year earlier, according to the Real Estate Institute.

Bollard on September 11 said a marked slowdown in the local economy and deteriorating world growth would cool inflation. Since then, evidence has mounted that the US is lurching into recession and the global economy may be heading for a prolonged slump.

By Jonathan Underhill

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