Food prices still lower than a year ago

New Zealand food prices edged up in May, mainly through rising meat prices. However, food prices are still 0.1% below what they were this time last year.

Prices rose 0.3% in May from April when they gained 0.2%, according to Statistics New Zealand. ASB economist Jane Turner said food-price inflation remained subdued and would continue to contribute to weak headline inflation outcomes in the near term.

''We expect that food-price inflation will increase over the coming year, largely reflecting higher prices for meat and dairy, as well as a pick-up in wage costs.''

The Reserve Bank had to weigh up low headline inflation against the expectation of increased inflation pressures in the next few years as the economy gradually recovered, she said.

Food prices made up about 19% of the consumers price index (CPI), which would be released for the second quarter on July 16. The Reserve Bank on Thursday forecast inflation of 0.3% for the quarter, taking annual inflation to 0.8%, making it the fourth quarter in a row below the central bank's target of between 1% and 3%.

The central bank forecast the annual CPI to return to the band in the third quarter, rising above 2% in June 2015, when interest rates were tipped to start increasing as domestic demand increased inflationary pressures.

Ms Turner said increasing meat prices in May reflected rising pork prices and an increase in lamb prices as the impact of the drought caused a fall in meat supplies.

Dry weather conditions and poor grass growth over summer saw livestock slaughter brought forward, resulting in a surge in meat supply and a fall in prices in February and March.

Grocery prices remained flat, with prices still 1.3% below year-ago levels. In the past year, there had been some decline in dairy prices.

But with global dairy prices surging in recent months as a result of the New Zealand drought last summer, further falls in dairy prices at the retail level were unlikely and prices were expected to lift later this year, she said.

Wage inflation was a large contributor to costs in the restaurant and takeaway sector, and weak inflation pressures were helping contain price increases.

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