Inflation at 2.4% for the year

By Felicity Anderson, Nzoom.com Business News Editor

Monday 15th October 2001

The Consumers Price Index (CPI) rose by 0.6% in the September 2001 quarter, according to Statistics New Zealand (SNZ).

The increase, widely predicted by economists, follows a rise of 0.9% in the June quarter.

On an annual basis, the CPI is 2.4% higher than a year earlier. The CPI measures inflation in the economy.

Economists say there is every chance that the Reserve Bank of New Zealand will feel comfortable about easing its benchmark interest rate by at least 25 basis points at its next monetary policy statement on November 14.

The RBNZ had forecast the CPI for the September quarter would be 0.6%. It has also forecast inflation will fall back over the coming year to be well within its target band of 0-3%.

Bank of New Zealand economist Stephen Toplis says the accuracy of the forecast removes inflation concerns for the central bank and allows it to concentrate on concerns about the global economic slowdown and how that interacts with domestic consumer and business confidence.

"These factors already suggest the RBNZ should ease in November," Toplis says. "We (the BNZ) are factoring in a 25 basis point cut with a 50:50 chance of 50bps."

If RBNZ Governor Don Brash does cut the official cash rate (OCR) by 50bps, it would take New Zealand's key interest rate back to 4.75%, from the current 5.25%.

Westpac economist Nick Tuffley says the bank's team is "going bold and going hard" and predicting Brash will cut by 50bps.

He says the interesting part of the CPI data is the fact that the exchange rate didn't have too much influence on inflation, nor did the spike in the wholesale cost of electricity. If the peak in the wholesale cost of electricity hurt some companies hard for a couple of months, Tuffley says any prices rises appear to have been held or filtered back.

Westpac is in tune with most predictions that NZ's inflation rate will fall back to more like 1.5% by the end of next year.

Deutsche Bank's Chief Economist Ulf Schoefisch thinks the central bank will ease by 25bps, but with a possibility of 50bps.

"It's probably better to err on the aggressive side," Schoefisch says.

SNZ says the September quarter increase was strongly influenced by higher prices for food, alcoholic drinks and local authority rates.

Food prices rose 1.8%, driven by price rises in grocery foods (up 1.4%), and meat, fish and poultry (up 4.2%).

Grocery food prices were mainly influenced by a 4.1% rise in milk prices. Milk prices have increased by 10.8% over the past year.

The quarterly increase in meat, fish and poultry prices was driven by higher beef prices (up 4.4% in the September quarter).

Alcoholic drink prices contributed strongly to the overall CPI movement in the September 2001 quarter, increasing by 2.3%. This increase follows a rise of 0.5% last quarter. Both these increases reflected a June 2001 increase in excise duty on alcohol.

The housing group rose by 0.6% in the quarter, driven by an increase in home ownership costs, which rose by 0.7%.

Within the home ownership subgroup, a 2.7% increase in local authority rates made the greatest contribution.

The most significant downward contribution came from a fall of 1.1% for transportation prices. This movement was mainly due to lower prices for petrol (down 4.1%) and airfares (down 2.6%).

Petrol prices are now 7% lower than in the September 2000 quarter. A rise in prices was recorded for used cars (up 1.1% in the September 2001 quarter). Used car prices are 4.1% higher than a year earlier.

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