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New Zealand 'on the cusp of outright deflation'

Photo: Shutterstock

New Zealand inflationary pressures remained non-existent in December quarter of 2015 with CPI falling 0.5% in non-seasonally adjusted terms.

The decline, far greater than the 0.2% fall expected, left the annual rate at just 0.1%, down on the 0.4% increase seen in the September quarter.

The annual increase was the slowest recorded since Q3 1999.

Core inflation, that which excludes energy and food prices, increase by 0.3% during the quarter, leaving the annual rate at just 0.9%.

The chart below from Statistics New Zealand reveals the disinflationary trend seen in recent years.

“Petrol prices, down 8.1%, made the largest downward contribution for the year,” said Statistics New Zealand.

“Excluding petrol, CPI showed a 0.5% increase in the year to the December 2015 quarter. The small movement for the year was also influenced by both lower vehicle relicensing fees and international air fares.”

Offsetting the large decline in petrol prices, housing and household utility prices increased 2.8%.

“Housing-related prices in Auckland increased by more than the national average, with new houses up 7.2% and rents up 3.3% from a year earlier,” said Matt Haigh, consumer prices manager at Statistics New Zealand.

Despite the lower New Zealand dollar, prices of tradable goods and services – those influenced by developments in overseas markets – fell by 2.1%, largely offsetting a 1.8% increase in prices for non-tradable goods and services, those influenced by domestic factors.

The huge miss – both in quarterly and annual terms – has hit the New Zealand dollar hard, sending the NZD/USD down more than 1% on the back of mounting rate cut expectations.

The Reserve Bank of New Zealand next meets to discuss interest rates on January 28. With headline and core inflation both below the RBNZ’s 1-3% target band, many now expect the bank to cut the nation’s overnight cash rate further in the months ahead.

“The surprising fall in CPI inflation could prove to be a game-changer for the RBNZ as it leaves New Zealand on the cusp of outright deflation,” wrote Paul Dales, chief Australia and New Zealand economist at Capital Economics.

“It may not quite be enough to prompt the RBNZ to cut rates at next Thursday’s policy meeting, but it certainly supports our non-consensus view that rates will be cut from 2.5% to 2.0% this year.”

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