Lower food prices help keep CPI low

The Consumer Price Index out late this week is expected to show inflation rose slightly in the year ended December but that inflation pressures remain muted.

ASB economist Jane Turner said the index, the official measure of inflation, was expected to have remained unchanged in the three months ended December to take annual inflation to 1.1% from 0.8% in September.

That would also see inflation move back inside the Reserve Bank's inflation target band of 1% to 3%.

December was a seasonally weak quarter for inflation, largely due to the seasonal decline in fruit and vegetable prices heading into summer, she said.

Food items made up 19% of the CPI basket and, as a result, food prices tended to have a large impact on the quarter-to-quarter movements in inflation.

''Beyond food prices, we expect tradeable inflation to remain subdued,'' she said.

Non-tradeable inflation should continue to show signs of rising, albeit from a low rate. Continued rises in construction costs, rents and insurance premiums were likely to remain key drivers, Ms Turner said.

With inflation at the bottom end of the Reserve Bank's target band, and with the pace of the economic recovery remaining subdued, there was little urgency to increase the official cash rate.

ASB economists expected the Reserve Bank to leave the OCR unchanged at 2.5% until December.

However, there were upside risks to the inflation outlook which the Reserve Bank would watch carefully, she said. The key ones were the second-round inflation pressures from the Canterbury rebuild and the recent increase in housing market pressures.

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At a glance

• Fourth-quarter inflation expected to remain flat.
• Annual rate expected to be 1.1%
• Seasonal decline in food prices, the elevated dollar and continued discounting to keep inflation pressures muted.
• Construction costs likely to accelerate as rebuilding starts.

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