Inflation lower than expected

Second-quarter and annual inflation rates have come in slightly softer than expected, both at 0.4%, underlining the likelihood of the Reserve Bank cutting the interest-driving official cash rate in August.

Statistics New Zealand noted higher petrol and housing-related prices were countered by lower prices for meat and domestic air fares.

The consumer price index, which measures household inflation, was expected to come in around 0.5% for both the quarter to June and year to June, while the Reserve Bank expectations had been 0.6% for both.

Westpac acting chief economist Michael Gordon said the main factors boosting inflation were increasing construction costs and, recently, higher petrol prices.

"The softer-than-expected result reinforces the case for a 25-basis point reduction in the OCR in August,'' he said.

Petrol prices showed the largest upward contribution, up 5.3% for the quarter, which followed declines in December and March of 7% and 7.7% respectively.

The average price of 1 litre of 91 octane was $1.78 for the quarter, up from $1.69 in the previous quarter.

ASB chief executive Nick Tuffley also believed there would be an August OCR cut from the present 2.25%, and had "pencilled in'' a further cut to 1.75%.

He noted, however, that the Reserve Bank's economic update on Thursday would be the key influence on the likelihood of an August cut.

"The details show that what little inflation there was came from petrol and housing-related prices,'' he said.

Housing and household utilities prices rose 1% for the quarter, influenced by higher prices for newly built houses, excluding land, which was up 2.1%. Electricity was up 1.8% and rentals for housing were up 0.6%.

Meat prices, down 2.7%, made the largest downward contribution for the quarter, followed by domestic air fares, down 9.9%. Domestic air fares have fallen 14% since the December 2015 quarter.


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