While falling inflation is problematic in justifying the Reserve Bank's intention to raise the OCR, it also puts pressure on the Government, prompting more domestic consumption and possibly increased borrowing.
While house prices underpinned a small quarterly tick up in inflation, by 0.3%, the annual inflation rate fell, against expectations, from 1.6% to 1%, Statistics New Zealand data announced yesterday revealed.
The consumers price index (CPI) rose 0.3% in the quarter to December - the third consecutive quarterly rise of 0.3% - but with annual inflation trailing down to 1%, some analysts are expecting it could yet soften further.
ASB economist Christina Leung said the result pointed to an even more subdued inflation environment than both the ASB and Reserve Bank had expected and the surprise affected both tradeable and non-tradeable inflation.
''Annual inflation is now at the bottom of the Reserve Bank's target band, and looks likely to remain around 1%, or even slightly below that, over the next two quarters,'' she said.
Housing and household utilities were up 3.4% annually, accounting for about four-fifths of the annual increase, while petrol was the third main downward contributor, down 1.8%.
Z Energy yesterday dropped fuel prices a further 2c per litre, across all fuel grades, the fourth 2c decrease across grades during the past fortnight, attributable to the dropping barrel price of crude oil.
The unexpected decline to 1% annual inflation prompted the Council of Trade Unions (CTU) and Green Party to call for scrutiny of wages and power prices.
CTU economist Bill Rosenberg said housing and electricity costs were driving annual inflation.
At an annual increase of 1%, overall inflation is lower than expected and almost 80% of that is housing and energy costs.
''The Reserve Bank should be considering lowering interest rates rather than raising them,'' he said.
Also, now was a good time for workers to negotiate for pay increases that outstrip price rises and deliver real increases in wages and salaries.
''For too many people, real pay increases have been missing for several years unless they worked longer hours,'' Mr Rosenberg said.
''Productivity has been rising for several years but hasn't been recognised in pay increases,'' he said.
Green Party Co-leader Metiria Turei said power prices had risen at more than double the inflation rate since National took office, showing its hands-off approach to the electricity market was a failure.
While then CPI rose just 1% in the year to September, power prices rose 3.7%. Since December 2008, when National took office, power prices have risen 24.6% and the CPI has risen 11.8%, Mrs Turei said.
''Kiwis have just had a gutsful of price rises when power companies are reporting flat or falling demand for power,'' she said.
Westpac chief economist Dominick Stephens said the main reason for the inflation drop was very low food prices over winter, and a large increase in fuel prices seen in September 2013, had subsequently dropped out of the annual inflation calculation.
''But the weakness in inflation is not just food and petrol. The underlying trend in inflation is very weak, and has been for some time,'' he said.
Housing-related inflation was the exception to the overall trend, and continued to accelerate in response to the construction boom, Mr Stephens said.
Ms Leung said several developments led the ASB to push back its expectation of when the Reserve Bank would resume its OCR tightening cycle, from March to September 2015.
