Annual inflation, measured by the consumer price index (CPI), has hit a surprise 13-year low of 0.8% and raised questions about the Reserve Bank cutting the already record-low official cash rate.
The low annual inflation rate up 0.8%, is below the Reserve Bank's target range of 1% to 3%, and has prompted calls for an easing of monetary policy and to cut the interest driving official cash rate (OCR) which, at 2.5%, is at a record low.
The CPI's annual increase at 0.8% was the smallest annual movement, since a 0.5% rise in the year to the December 1999, and was below market expectations and Reserve Bank official forecasts, which were expecting a 0.5% gain for the quarter and a 1% rise for the year.
The Statistics New Zealand CPI data identified local authority rates as "key contributor" to the quarterly rise, being up 3.6%, and up 4.1% for the year to September.
ASB senior economist Jane Turner said the 0.3% quarterly increase was expected from food prices, accelerated construction costs and rising insurance premiums, while the rise in council rates was less than expected.
"Construction-related costs are starting to come through, as expected," she said.
Construction costs lifted 1% during the quarter, led by a sharp 3.4% increase in Canterbury construction costs. Construction inflation in Canterbury is now running at an annual rate of 9.6%.
ASB now expected the OCR would next be raised, not from June but pushed out further to September next year, that shift being largely based on factors other than the muted third-quarter inflation outcome.
"The slow pace of euro zone crisis resolution, coupled with dim euro zone growth prospects, and likelihood of further Reserve Bank caution over persistent New Zealand dollar strength all argue for a much later start than June," she said.
The New Zealand dollar dropped by a quarter of a US cent yesterday when the CPI data came in well below market expectations.
Green Party co-leader Dr Russel Norman said the overvalued New Zealand dollar was hurting exporters and manufacturers who compete with imports - one of the main drivers of massive job losses in this sector - and was also contributing to New Zealand's worsening current account deficit.
Lowering the OCR was likely to lead to lower domestic interest rates which, in turn, would take pressure off the overvalued exchange rate.
"Low inflation gives the Reserve Bank generous scope to cut the OCR as a first step to addressing our overvalued currency," Dr Norman said.
Westpac chief economist Dominick Stephens said the CPI rose 0.3% for the September quarter, taking annual inflation down to a 13-year low of 0.8%.
"This was even weaker than our below-market forecast, and follows a string of weak inflation outcomes," he said yesterday.
The Reserve Bank's 1%-3% target is framed in terms of its inflation forecast, which will still be lingering close to 2% on average after yesterday's CPI data, Mr Stephens said, describing any potential for an OCR reduction as a "risk scenario rather than a likelihood".
The downward pressure surprise was mainly due to two quirks that are unlikely to be repeated; that used car prices fell 2.8% and domestic air fares fell 7.8%, Mr Stephens said.
With inflation once again coming in below the Reserve Bank's forecast, it stoked markets' interest in the possibility of OCR cuts, he said.
Inflation contributors
Quarter to September (up 0.3%)
Food up 1.1%
Housing and household utility prices up 0.8%
Misc goods and services (including dwelling insurance) up 1.1%
Year to September (up 0.8%)
Housing and household utility prices up 2.8%
Alcohol and tobacco up 5.6%
Misc goods and services up 3.4%
