Food prices fall in July, cementing expectations interest rates are on hold till 2015

New Zealand food prices declined in July, adding weight to speculation that softer inflation will prompt the Reserve Bank to keep the benchmark interest rate on hold until next year.

The food price index fell 0.7 percent from June, its first decline in four months, as discounting led to lower prices for beef and processed meat, Statistics New Zealand said. The index was 0.1 percent lower than July last year, the first annual decline in 14 months, led by lower prices for fruit and vegetables, the agency said. (See graph below)

Food prices are one of the components eyed by economists as they evaluate the pace of inflation, as they make up about 19 percent of the broader consumer price index compiled by Statistics New Zealand. Weaker inflation means the Reserve Bank may hold off raising the official cash rate again until next year, analysts said.

"The result adds to recent inflation indicators pointing to a subdued inflation environment for now," ASB Bank economist Christina Leung said in a note. "With the Reserve Bank already having put through 100 basis points of OCR increases this year, we expect it will now pause until next March to assess the effects of the tightening it has done to date."

The Reserve Bank will probably increase the benchmark rate four times next year, with interest rates peaking at 4.5 percent at the end of next year, Leung said.

July food prices fell from June as fruit and vegetable prices slipped 0.9 percent; meat, poultry and fish prices slid 2.2 percent; and grocery food prices declined 0.7 percent, the statistics agency said. Meanwhile, non-alcoholic beverage prices rose 0.2 percent and restaurant and takeaway food prices remained unchanged, it said.

Compared with July a year earlier, fruit and vegetable prices were the only subgroup to record a decline, sliding 5.9 percent, Statistics New Zealand said. Meantime, meat, poultry and fish prices increased 0.5 percent; grocery food prices rose 0.2 percent; non-alcoholic beverage prices gained 1.5 percent; and restaurant and takeaway food prices advanced 2.2 percent, it said.

(BusinessDesk)