16 Jul 2014

Inflation lower than expected

1:27 pm on 16 July 2014

Economists believe a lower than expected inflation outcome in the June quarter, on top of the plunge in wholesale dairy prices, could force a rethink by the Reserve Bank over an expected interest rate rise later this month.

The Consumers Price Index rose 0.3 percent in the three months ended June, taking the annual increase to a lower-than-expected 1.6 percent.

Economists had been expecting a quarterly rise of 0.4 percent and an annual inflation rate of 1.8 percent. The Reserve Bank had been expecting a 1.7 percent annual increase.

The Government Statistician says the largest contributions to the latest quarter's increase came from higher housing costs, a 4.2 percent rise in power prices and a rise of just under 5 percent in fruit and vegetable prices.

The chief economist at Westpac, Dominick Stephens, says although the actual inflation numbers were only slightly weaker than expected, the key contributors were also weaker.

"If you scratch beneath the surface I think what we're seeing is a picture of inflation which is not as fear-inducing as the Reserve Bank may have expected. Housing related inflation, which is the bit which can become persistent and entrenched and create ongoing inflation, was not as strong as expected so the price of building a new house did not rise particularly, rents in Auckland remain very weak actually, property maintenance costs didn't particularly rise strongly."

He said the inflation report paints a more benign picture of inflation as might have been feared.

Mr Stephens said there's good reason for the central bank to at least reconsider when interest rates need to rise further.

"In June the Reserve Bank signalled pretty clearly that if things evolved as expected, it would expect to hike the OCR in July. I think markets moved to price that as pretty much a done deal, however the double-whammy of weak data we've had does cast next week's July OCR hike into doubt, in my mind."