Tight margins as consumer prices rise at slowest pace in 13 years

Business New Zealand economist John Pask

BUSINESSDESK: New Zealand companies are facing a tough operating environment as they try to squeeze profit from their customers in the face of consumer prices rising at their slowest annual pace in 13 years.

The consumer price index rose 0.3% in the three months ended September 30, taking the annual pace of inflation to just 0.8%, below the Reserve Bank's target band of between 1% and 3%. That is the slowest annual rate of inflation since December 1999.

The figures come a week after the New Zealand Institute of Economic Research's quarterly survey of business opinion showed a net 21% of firms experienced dwindling profits in the quarter, and as just a net 3% expected profits to improve. A net 14% saw prices rising in coming months, up from a net 10% in June.

"Agriculture is still doing okay, despite prices coming off a bit, and we're observing a big rebuilding effort in terms of Christchurch. But we don't see a huge upswing in terms of other areas where it's going to be a pretty slow, hard grind," Business New Zealand economist John Pask says.

"Margins are still pretty tight, particularly in certain sectors" such as retail.

Today's CPI showed the level of discounting by retailers accelerated in the quarter, with 12% of prices collected at a lower price, down from 11% in the June period.

The heaviest discounting came from major household appliances, at 35%, followed by 29% for small electrical household appliances and the same reduction offered on electrical appliances for personal care. Audio-visual equipment was reduced by 28%.

New Zealand's services sector activity shrank last month for the first time since July 2010, and manufacturing trading contracted for a fourth month.

In recent months, some exporters have been leaning on the Reserve Bank to cut interest rates to dim the yield appeal of the currency and provide extra stimulus to revive the slowing economic recovery.

The kiwi dollar fell a quarter of a US cent immediately after the CPI release and recently traded at 81.59 US cents. New Zealand's 90-day bank bill rate fell 5 basis points to 2.65%.

Mr Pask says there is an outside chance the central bank may cut the official cash rate from a record-low 2.5%, though New Zealand is still a relatively strong position compared to its global peers.

"We shouldn't be pessimistic. Compared to the rest of the world we're doing pretty well." 

Westpac Banking Corp chief economist Dominick Stephens and economist Michael Gordon say the strong New Zealand dollar and tepid global inflation was behind the flat tradable inflation in the quarter.

A rate cut is a possibility rather than a likelihood, they say in a note.

ASB Bank pushed out its forecast for a rate hike until September next year as the slowing European economy and its sovereign debt crisis keep global financial markets uneasy.

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