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Inflation slows to 0.3%, the slowest annual rate since 1999

BUSINESSDESK: New Zealand consumer prices rose less than expected in the second quarter for the slowest annual pace since December 1999, as cheaper telecommunication prices offset the rising cost of electricity and rentals.

The consumer price index increased 0.3% in the three months ended June 30, according to Statistics New Zealand, slower than the 0.5% pace forecast by a Reuters survey of economists and unchanged from the first quarter.

The annual pace of inflation was 1%, slower than the 1.1% forecast and at the bottom of the Reserve Bank's target band of 1% to 3%.

Today's figures mean the Reserve Bank won't have to worry about any inflationary pressures creeping in from the rebuild in Canterbury, allowing governor Alan Bollard to keep the official cash rate lower for longer.

The kiwi dollar fell to 79.62 US cents after the numbers from 79.74 cents immediately beforehand. Two-year interest rate swaps fell 0.9 basis points to 2.59%.

Earlier this week, traders were betting he will cut the official cash rate in the next 12 months, based on the Overnight Interest Swap curve, which shows 17 basis points of cuts priced in, according to Reuters data.

They are seeing a chance that the central bank stands ready to act to stimulate growth should Europe's sovereign debt woes escalate and spread to the rest of the world.

“Subdued inflation will be the theme for a while longer,” Westpac Banking economist Michael Gordon said in a note before the release.

“Cost pressures generated by the Christchurch rebuild will become a more significant factor over time, although the weak starting point for inflation means that the RBNZ will be in no hurry to start pre-emptively leaning against these pressures.”

The communication group showed the biggest quarterly drop in consumer prices, falling 2.5%. That was led by a 3.8% decline in the price of telecommunication equipment and a 2.5% fall in the price of services. The price of audio-visual and computing equipment fell 3.2% in the quarter.

"This reflected increased data caps for broadband plans and better-value cellphone services," Statistics NZ said in its report.

On an annual basis, communication group prices were down 9.5%, led by a 28% fall in the price of telecommunication equipment.

Higher electricity prices and rents pushed up the housing and household utilities group, which rose 1% in the quarter. Electricity prices rose 4.5% and were "influenced by widespread electricity tariff increases".

Petrol prices was up 0.4% to the highest recorded level. Still, prices fell late in May and continued to decline through June. Petrol prices rose at an annual 0.2% pace.

"If petrol prices remained at their end-of-June level throughout the September quarter, this would shave 0.4 of a percentage point off the September quarter CPI movement," Statistics NZ said.

Non-tradable inflation slowed to quarterly pace of 0.5% and was 2.4% on an annual basis.

Tradable inflation, which covers items that are open to foreign competition, accelerated to a quarterly pace of 0.1% after shrinking 0.4% in the first three months of the year.

Annual tradable consumer prices shrank 1.1% from the same quarter a year earlier. 

Comments and questions
11

Who believes the official inflation figures? Everything has sky rocketed since Xmas. Power, rates, rents and house prices to name just a few things.
I cannot recall a time recently when prices have gone up so much.
Incomes are virtually stagnant.
Tell ordinary people in the street that the rate of the cost of living is at the lowest since 1999. They would laugh in your face.
Huge numbers of people cannot afford to buy a basic house and struggle to pay the high cost of rent in Auckland.

The problem is that the authorities/RBNZ do not know what causes inflation, so it is self evident they are unable to measure it, or control it.

Surely it is fundamental, and not to much to ask, that someone who wishes to hunt down or measure pigs, should at the very least know what a pig looks like? No?

You misunderstand what the CPI statistics are saying. It is not the lowest cost of living since 1999, it is the lowest rate of increase in the cost of living since 1999.
I agree with you that the experience on the street tells an entirely different story to the official statistics.

"..... several high(er) cost consumer items are excluded from the calculation of inflation rates"

And why are they excluded?

House prices, peoples largest cost, are exempt

CPI data seems wrong with personal experience out there.

Two ex-colleagues have agreed to take pay cuts over the last 18 months because their employers are struggling to remain viable. With an uncertain job-market my friends feel they have no choice.

Even at 0% inflation many of NZ's workers are going backwards.

Go to www.stats.govt.nz for details on how the CPI is calculated. For example there are 690 goods and services in the CPI basket, across 11 different sectors. It's an interesting read.

Are we heading towards a deflationary climate?

Here's the link to the CPI definition:

http://www2.stats.govt.nz/domino/external/omni/omni.nsf/outputs/Consumers+Price+Index#Design

It's also obvious that while the CPI's basket of goods may go up by 1%, your basket of goods may go up or down by a lot more. In fact, the lower people's incomes, the larger part of their income will go in untradables. In other words, when you're broke, you're not buying many of these cheap LED TVs, international airfares and high-data broadband plans!