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The December Consumer Price Index (CPI), the official measure of inflation, fell 0.2%, weaker than market expectations and the Reserve Bank forecast of a 0.1% rise. Annual inflation edged up to 0.9%, the third successive reading at or below 1%.
The Reserve Bank has an inflation target of between 1% and 3%. Ms Denne said repeated undershooting of inflation would inflame the debate on whether there had been a structural shift in the evolution of inflation.
''Inflation suppressants in the form of deleveraging - think credit growth below GDP - and a high New Zealand dollar look set to be around for a while yet.''
Without a the rebuilding of Christchurch and a ''perkiness'' across the housing market, the case for a lower official cash rate would be solid, she said.
However, both presented risks to the medium-term outlook for inflation which carried the implication the odds remained tilted towards the next move in the OCR being up as opposed to down, Ms Denne said.
Most economists are moving their forecasts from the Reserve Bank lifting its OCR from the current low of 2.5% from December to March next year. Labour Party finance spokesman David Parker said the latest deflation showed a need to reform the Reserve Bank's ''tunnel vision mandate''.
Prices dropped in the last three months of the year while the housing market took off and the dollar remained stubbornly high. That showed the need for monetary policy reform, he said.
''Our monetary policy has passed its use-by date. The Reserve Bank has a tunnel vision mandate that requires it to primarily consider the prospect of increasing inflation. This pushes other big issues - our overvalued and damaging exchange rate - down the priority queue.''
Labour had long argued the Reserve Bank must be able to look beyond inflation and give weight to other important issues such as the exchange rates and jobs, Mr Parker said. That would help exporters and manufacturers and allow them to create good jobs that paid a decent wage.
Statistics New Zealand figures showed that a 1.8% seasonal fall in food prices was a large contributor to the weaker-than-expected inflation figures.
Discounting in furniture, clothing and personal effects, along with the general weakness in imported retail items, saw tradeable inflation fall 0.7%. That was partially offset by a 0.3% increase in non-tradeable prices, led by an increase in housing-related prices.
At a glance
• December inflation: -0.2%
• Annual inflation: 0.9%
• Lower food prices main contributor
• OCR likely to remain 2.5% until March