18 Apr 2009

Inflation rate slows to 3%, food more expensive

7:05 am on 18 April 2009

The annual rate of inflation has slowed to 3% - its lowest point in nearly two years - and has returned to within the Reserve Bank's target band.

The Consumers Price Index rose 0.3% in the March quarter, following a 0.5% fall in the final three months of last year.

The largest contributors to the first quarter increase were food prices - which rose 1.2% - and cigarette prices.

Those increases were partially offset by a 16.5 % fall in the cost of international travel and lower diesel and petrol prices.

Annual inflation fell to 3%, the first time it has been within the Reserve Bank's target band of 1% to 3% since the September 2007 quarter.

The inflation rate had been at 3.4% in the year to the December 2008 quarter and 5.1% for the year to the September quarter.

The biggest contributor to the annual rate was food, which rose 8.8%, electricity, which was up 7.5%, and rents.

ASB economists say the weaker New Zealand dollar increased the cost of imports during the three-month period, as shown in a 3.5% jump in the price of second-hand cars.

The price of computers, electrical goods, clothing and house and garden tools also rose on the back of a weaker New Zealand dollar during the period.

ANZ economist Philip Borkin says the big fall in international commodity prices over the past 12 months was finally showing up in lower food price increases.

Economists expect the annual rate of inflation to dip below the lower end of the Reserve Bank's target band in the third quarter of this year, as the impact of the spike in oil prices last year drops out of annual inflation calculations.

ASB economists say Friday's figures and the weak outlook for inflation clear the way for the Reserve Bank to cut the Official Cash Rate by half a percentage point at its next review on 30 April.

The Official Cash Rate is currently 3%.

Food more expensive

Statistics New Zealand's Food Price Index, also released on Friday, reported a 0.5% increase in food prices in March, following a 0.2% increase in February. In the past year, food prices have risen almost 9%.

The index shows the price of bread and beef rose in March, while tomatoes and cheddar cheese prices dropped. Cheese now costs 11% less than it did the same time a year ago.

An associate professor of human nutrition at the University of Otago, Winsome Parnell, says she is concerned by the rise in staple foods such as fresh chicken and beef.

She says the 13% increase in bread in the past year will have disadvantaged many, as it is a key part of many New Zealand diets.

Call for monetary policy change

The Manufacturers and Exporters Association is urging a change in monetary policy to keep inflation down, saying it has taken two years and a recession to get inflation back down to 3%.

Association chief executive John Walley says changes to the Reserve Bank Act are needed to provide alternatives to interest rates as a mechanism to control inflation.

He says in the meantime, business wants to see the Official Cash Rate pushed down to 2% this month to stimulate growth.

UBS investment bank economist Robin Clements says monetary policy already complies with international best practice and while it may not be a perfect solution, no-one has come up with a better one.