Prices fall 0.2% in December quarter; reinforces RBNZ view to keep OCR on hold til mid-2010 (Update 4)

Prices, as measured by the Consumers Price Index (CPI), fell 0.2% in the December quarter from September, figures released by Statistics New Zealand show. The drop was in line with the Reserve Bank of New Zealand's forecast and is likely to reinforce the central bank's view that it can keep the Official Cash Rate on hold at 2.5% until 'around the middle' of 2010. (Update 1 includes Stats NZ comments. Update 2 includes further Stats NZ comments on trimmed mean measures showing underlying price change "quite flat" over December quarter. Update 3 adds economist comments. Update 4 tracks NZ$.) Economist predictions had centred around a flat CPI during the December quarter, and ranged from of a 0.3% fall to a 0.3% rise. Stats NZ said its trimmed mean measures, which exclude extreme price increases and decreases, recorded quarterly movements ranging from no change to 0.1%. "This indicates that underlying price change for the quarter was quite flat," Stats NZ said. The CPI rose 1.3% in the September quarter, 0.6% in June and 0.3% in March. The New Zealand dollar initially fell by around 0.4 USc on the news to 73.5 US cents. Just after midday, the NZ dollar had fallen almost 0.75 USc to 73.25 USc.

The quarterly drop was led by a 2.4% fall in food prices from September, which was driven by lower prices for vegetables from their winter peak. The fall in food prices was partly offset by a 1.5% rise in the transport group, in particular a seasonal jump in international airfares, Stats NZ said. The CPI increased 2% in the year to the December quarter, with non-tradable goods and services (which do not face foreign competition) up 2.3% and tradables (which are imported or in competition with imported goods) up 1.5%. The annual rate brings the CPI to the mid-point of the Reserve Bank's 1-3% target range for the CPI over the medium term. "This was the lowest annual increase in the non-tradables component since the December 2001 quarter, reflecting relatively low annual increases for electricity, rents, and the purchase of new housing," Stats NZ said. "Electricity prices were up 2.1% for the year, which is their lowest annual rise for more than seven years," Stats NZ prices manager Chris Pike said. "The annual trimmed mean measures recorded annual increases of between 2.2% and 2.4%, which are higher than the 2.0% increase in the all groups CPI," Stats NZ said. ASB economists Nick Tuffley and Christina Leung said they continue to expect the Reserve Bank to lift the OCR by 50 basis points to 3% in April:

Although the headline outcome was bang on the RBNZ's and our expectations, non-tradable inflation was on the milder side. Importantly, the housing impact on inflation remains muted for now, comfortably offsetting more stubborn inflation in labour-intensive services. The key implication for the RBNZ is that near-term inflation is benign enough to keep the RBNZ comfortable in the short term. Developments since the December Monetary Policy Statement have been close enough to the RBNZ's expectations that its near-term outlook for economic recovery and inflation will change little. We expect next week's OCR Review will show little extra urgency in the RBNZ's tone, with its assessment of hiking rates "around the middle of 2010" remaining in place and effectively ruling out a March OCR hike. We continue to expect the RBNZ will lift the OCR in April by 50bp, with April through July the most likely window for the first OCR increase. Inflation right now is sitting at the mid-point of the target band, with recession causing a surprisingly modest decline in underlying inflation. The early signs are now appearing that disinflationary forces will soon start to abate. We expect the RBNZ will need to start lifting the OCR back to a more normal level before too much longer, just not in January or March.

See all of our prices charts here. Here is the release from Stats NZ:

The consumers price index (CPI) fell 0.2 percent for the December 2009 quarter, Statistics New Zealand said today. This fall, which was driven by lower food prices and weaker increases for other goods and services, contributed to an annual increase of 2.0 percent. Food prices fell 2.4 percent in the December 2009 quarter, driven by lower prices for vegetables (down 17.6 percent), which fell strongly from their winter peak. Prices for the meat, poultry, and fish subgroup and the grocery food subgroup also fell in the December quarter. "Although food prices fell in the latest quarter, they were up 1.4 percent for the year and are 10.9 percent higher than two years ago," said Prices manager Chris Pike. The latest annual rise in food prices included reductions in some package sizes, which are shown as price increases in the CPI. The fall in food prices was partly offset by a 1.5 percent rise in the transport group, influenced by a 13.9 percent seasonal increase in international air transport. While international airfares were up strongly in the December quarter, these were still 9.6 percent lower than in the December 2008 quarter. Annually, the transport group recorded an increase of 3.7 percent, with prices for second-hand cars (up 13.3 percent) and petrol (up 3.3 percent) rising from relatively low levels in late 2008. The CPI increased 2.0 percent for the year to the December 2009 quarter. Non-tradable goods and services (which do not face foreign competition) rose 2.3 percent and tradables (which are imported or in competition with imported goods) rose 1.5 percent. This was the lowest annual increase in the non-tradables component since the December 2001 quarter, reflecting relatively low annual increases for electricity, rents, and the purchase of new housing. "Electricity prices were up 2.1 percent for the year, which is their lowest annual rise for more than seven years," Mr Pike said. The CPI measures the rate of price change of goods and services purchased by households. Statistics NZ visits 3,000 shops around New Zealand to collect prices for the CPI and check product sizes and features. Consumers price index quarterly movement The consumers price index (CPI) recorded a decrease of 0.2 percent in the December 2009 quarter, following increases of 1.3 percent and 0.6 percent in the September 2009 and June 2009 quarters, respectively. Four groups decreased, with food (down 2.4 percent) being the most significant contributor. Other downward contributions came from alcoholic beverages and tobacco (down 1.0 percent), communication (down 0.6 percent), and household contents and services (down 0.1 percent), while the education group recorded no overall change. Six groups recorded increases: transport (up 1.5 percent), clothing and footwear (up 1.8 percent), housing and household utilities (up 0.2 percent), recreation and culture (up 0.4 percent), health (up 0.6 percent), and miscellaneous goods and services (up 0.1 percent). The most significant individual downward contributions came from lower prices for lettuce (down 63.5 percent), audio-visual equipment (down 9.0 percent), and tomatoes (down 32.3 percent). CPI annual movement The CPI increased 2.0 percent in the year to the December 2009 quarter, following increases of 1.7 percent and 1.9 percent for the years to the September 2009 and June 2009 quarters, respectively. Nine of the 11 groups in the CPI made upward contributions to the increase in the year to the December 2009 quarter. The most significant upward group contributions came from transport (up 3.7 percent), housing and household utilities (up 1.6 percent), and food (up 1.4 percent). The recreation and culture group (down 0.5 percent) and the communication group (down 0.2 percent) made downward contributions. The most significant individual upward contributions came from higher prices for the purchase of second-hand cars (up 13.3 percent) and petrol (up 3.3 percent). The most significant individual downward contributions came from lower prices for international air transport (down 9.6 percent), audio-visual equipment (down 14.8 percent), and overseas package holidays (down 10.5 percent). CPI analytical series In the December 2009 quarter, the tradable component decreased 0.5 percent, following increases of 1.6 percent and 0.8 percent in the September and June 2009 quarters, respectively. The non-tradable component increased 0.1 percent in the December 2009 quarter, following increases of 1.0 percent and 0.5 percent in the September and June 2009 quarters, respectively. For the year to the December 2009 quarter, the non-tradable component increased 2.3 percent. The most significant upward contributions came from local authority rates and payments and from vehicle relicensing fees. The 2.3 percent annual increase in the non-tradable component is the lowest since the year to the December 2001 quarter, reflecting relatively low annual increases for electricity, rentals for housing, and the purchase of new housing. The tradable component rose 1.5 percent for the year to the December 2009 quarter. The most significant upward contribution came from the purchase of second-hand motor cars. In the December 2009 quarter, the trimmed mean measures, which exclude extreme price increases and decreases, recorded quarterly movements ranging from no change to 0.1 percent. This indicates that underlying price change for the quarter was quite flat. The annual trimmed mean measures recorded annual increases of between 2.2 percent and 2.4 percent, which are higher than the 2.0 percent increase in the all groups CPI.