Food prices rise 2.2% in October after GST hike on October 1

Food prices rose in line with the GST hike in October, with overall prices up 2.2% from September, Statistics New Zealand said today.

GST was increased by 12.5% to 15% on October 1, meaning prices would rise by about 2.2% if the increase was passed on by retailers. Stats NZ said it was not able to quantify how food prices would have changed during the month had GST not been raised.

"Food prices were affected by the rise in GST. About two in every five food prices collected in October 2010 increased by 2.0 to 2.5 percent, once prices affected by discounting were excluded," Statistics New Zealand prices manager Chris Pike said.

The most significant individual upward contributions to the overall figure came from higher prices for lamb (up 13.9%) and potatoes (up 16.4%), Stats NZ said.

The most significant individual downward contribution came from lower prices for lettuce (down 17.4%), although lettuce was still more than double the price it was this time last year (up 116.1% for the year to October 2010), Stats NZ said.

Food prices in October 2010 were up 5.1% from the same month a year ago.

Here is the release from Stats NZ:

Food prices rose 2.2 percent in the October 2010 month, Statistics New Zealand said today.

Prices were affected by GST rising to 15 percent on 1 October 2010.

"Food prices were affected by the rise in GST. About two in every five food prices collected in October 2010 increased by 2.0 to 2.5 percent, once prices affected by discounting were excluded," Statistics New Zealand prices manager Chris Pike said.

Grocery food prices rose 1.7 percent in October 2010, with higher prices for cakes and biscuits (up 4.0 percent), cheese (up 4.6 percent), and fresh milk (up 2.0 percent). For grocery food prices not affected by discounting, one in two rose by 2.0 to 2.5 percent. One in 10 prices rose by 2.5 to 5 percent, while one in six recorded no price change.

The fruit and vegetables subgroup rose 4.0 percent in October 2010. Fruit and vegetable prices usually fall in October, however, prices in October 2010 were affected by the GST rise and adverse weather in September. Unusual weather conditions in September pushed up prices in October for some vegetables, in particular broccoli and cabbage. In October, usual seasonal increases were recorded for potatoes, carrots, and apples.

Food prices rose 5.1 percent for the year to October 2010, influenced by the GST rise. All subgroups made upward contributions. The most significant upward contributions came from fruit and vegetables (up 16.4 percent) and grocery food (up 4.7 percent). The remaining three subgroups recorded higher prices: restaurant meals and ready-to-eat food (up 3.7 percent), meat, poultry, and fish (up 1.7 percent), and non-alcoholic beverages (up 0.7 percent).

If all the GST rise from 12.5 to 15 percent was passed on by a retailer (and all other things remained equal), a food item would have cost 2.2 percent more in October than in September.

Statistics NZ is not able to quantify how food prices would have changed in October if the rise in GST had not occurred.

Here is the reaction from ASB ecnoomist Christina Leung:

Food prices increased 2.2% in October, in line with the increase in GST from 12.5% to 15% that occurred at the beginning of the month. This suggests that excluding the effects of GST, overall food prices were broadly flat over the month. Within the detail, the price of fruit and vegetables and meat increased by more than the increase in GST. In addition to the GST increase, the 4% increase in fruit and vegetable prices also reflected the lingering effects of poor weather conditions in September which affected broccoli and cabbage crops.

Meanwhile, the 2.9% increase in meat prices also reflected the recovery in NZD-denominated international meat prices earlier in the year flowing through to the retail level. We expect a continued recovery in meat prices at the retail level over the coming months, given the elevated level of international meat prices.

Higher international commodity prices were also reflected in the substantial increase in the price of many dairy products. Within the 1.7% increase in grocery prices, there was a 6.3% increase in preserved milk prices and 4.6% increase in the price of other milk products.

Anecdotes have been mixed as to whether retailers have passed on the full cost of the GST increase at the beginning of October. While some retailers have chosen to use the GST increase to review their prices, others have chosen to absorb the GST increase into their margins. Today’s results are in line with these anecdotes, and show that on net prices increased in line with the GST increase. Incorporated in our current forecast of a 2.6% qoq increase in headline CPI for Q4 is the assumption that the GST increase boosts overall prices by just over 2%.

(Updates with economist reaction)