Inflation data hints at a 14-year low

Annual inflation may have returned to 14-year lows in the second quarter as a record high currency weighed on prices of imported clothing, competition drove down telecommunications costs and fuel costs fell.

The Consumer Price Index rose 0.3 percent in the second quarter for an annual pace of 0.8 percent, according to a Reuters survey of 10 economists and the Reserve Bank's latest estimates.

The annual rate would match the level of the third quarter last year, which was the lowest since the final quarter of 1999 – a year marked by nine months of deflation.

It would also give the central bank little reason to bring forward the timing of interest rate increases, even though it suspects inflation pressures are building in the housing market and from a kiwi trade weighted index that has tumbled from its second-quarter highs.

"The low annual pace of current inflation presents an awkward policy challenge for the RBNZ," says Nick Tuffley, chief economist at ASB, which is at the bottom of the range in the Reuters survey, forecasting quarter CPI of just 0.1 percent for an annual 0.6 percent.

"Continued downside inflation surprises may reduce the RBNZ's confidence of a lift in future inflation pressures," he says.

CPI growth of 0.8 percent in the second three months of the year would mark the fourth straight quarter where inflation has undershot the Reserve Bank's 1 percent to 3 percent target range. Traders see zero chance that the central bank raises the official cash rate from 2.5 percent at its next review on July 25.

However, they see 47 basis points of hikes in the next 12 months – equivalent to about two quarter-point increases, based on the Overnight Index Swap curve.

Fuel costs probably contributed to the transport component of the CPI recording the biggest decline in the second quarter, according to ASB and Westpac Banking Corp. Brent crude oil reached a 12-month high in February, though early in the second quarter it fell steeply.

Since the end of the quarter, petrol prices have gained and this week rose to a record-high 226.9 cents a litre.

Telecommunications prices probably weakened amid intense competition between phone companies.

Westpac senior economist Michael Gordon says the second quarter may be the last of persistently low inflation, given the effects of a weaker kiwi dollar and "a strengthening economy, a hot housing market and massive pressures on the building industry" which are "a recipe for higher home-grown inflation in the future".

The Reserve Bank agrees. Its June monetary policy statement has inflation speeding to 0.6 percent in the third quarter and an annual pace that increases to 1.1 percent.

(BusinessDesk)