Price inflation slump not likely to trigger OCR cut, say economists

Well, how wrong can you be?

Moderate price inflation was expected in today’s consumer price index (CPI) figures for the December quarter, with the average market forecast being a rise of 0.3%. That would have been in keeping with a moderately recovering economy, and perhaps with a bit of tail-wind from the Rugby World Cup holding the up prices, at least in the first month of the quarter.

Whoa, splatt. Prices overall fell 0.3% for the quarter, taking the annual rate from 4.6% at the end of September to 1.8% at the end of December.

The fall points to underlying weakness in the economy in some areas but there are a few one-off factors and it is too early to start singing the economic funeral hymns just yet.

But lets look at the bad news, first: the 1.5% fall in prices in the appliance, furniture and other household durable goods area suggests retailers are having to cut prices aggressively to maintain sale volumes (or even to just get people through the door.

Although it was clear a number of retailers have been aggressively (or desperately) discounting for some time, the size of the drop in that sector over just three months is surprising.

But other price drops look less perturbing. Vegetable prices were the largest, with a massive 25% drop, but these followed at 17% rise the previous quarter due to shortages caused by flooding in Australia.

“We blame the tomatoes,” is how HSBC Bank Australian and New Zealand chief economist Paul Bloxham, somewhat tongue-in-cheek, summed up today’s shock fall in price inflation.

But putting volatile measures to one side, he said, Statistics New Zealand’s data shows the “trimmed mean” and “weighted median” CPI measures show price inflation of 0.2% and 0.4% respectively for the quarter.

“So there is no getting around the fact that inflation is well contained in New Zealand.  The underlying measures are now around the middle of the Reserve Bank of New Zealand 's target band.”

The central bank is to review the Official Cash Rate (OCR) next Thursday and although today’s figures raise the possibility of a rate cut the fact the OCR is at a historic low means governor Alan Bollard is more likely to await further developments.

Continued global uncertainties are a good reason for Dr Bollard to stay put next Thursday, said UBS New Zealand economist Robin Clements, but the absence of price inflation pressures makes that stance more comfortable.

“Downside risks to global growth, domestic demand and inflation mean that the risk is that the period of no change in the OCR is longer.”

As for today’s figure, while “a good chunk” is due to fruit and vegetable prices, the evidence of price discounting indicates that retailers will be experiencing poorer margins.

“With the risk that domestic demand remains subdued (consumer confidence is below average) and that the negative consequences of the Eurozone sovereign debt crisis are still percolating their way through, the pricing environment is likely to stay difficult.”

TD Securities strategist Annette Beacher said Dr Bollard is likely to want to stay on hold rather than cut next week as the central bank may need to keep enough ammunition in the locker if offshore economic volatility turns particularly nasty.

“Should capital markets become dysfunctional, there is certainly scope for another ‘emergency, insurance’ cut in the coming months.”