By Roger J Kerr This Wednesday's inflation data for the December quarter will be a timely reminder to all and sundry that you do not see much in the way of upwards price pressures coming out of the back-end of an economic recession. Which industries or sectors are in a position to push up prices in an environment of flat and subdued economic demand and get away with it? They might try, but suffer decreased sales as discerning buyers look for cheaper alternatives. A number of factors are playing into the low inflation outcome, falling fruit/vegetable prices and the higher NZD allowing for massive discounting on imported consumer goods. Thankfully we are no longer seeing the usual increases in electricity and local body rates.
The local market may be not too surprised at a -0.2% CPI result for the December quarter (this is what the RBNZ is forecasting), however overseas players in our financial markets would read a low inflation outcome as interest rates staying lower for longer in NZ. But, what is more important for the interest rate markets is what inflation will do in the future. Outside the economy growing at 4% this year (which is ridiculously optimistic in our view) the inflation outlook is a benign 1.5% to 2.00% per annum over the next 18 months. The longer the NZD stays above 0.7000 to the USD, the weaker the economic growth in 2010 (exporters not expanding) and the greater likelihood of inflation being closer to 1.00% than 2.00% as traded goods continue to decrease in price. There are some price pressures coming from increased agricultural commodity prices and construction costs, but I would not see these pushing the overall inflation rate up too much this year. The agricultural prices may have moved as high as they are going to go. It this point, it is extremely hard to see the factors that will cause the RBNZ to lift official interest rates before June. September seems a more realistic timing for me, so the current market pricing for March and April increases appears more based on hope from some quarters, than what will prove to be flat economic outcomes for the next six months. "”"”"”"”"”- * Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
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