19 Jan 2015

Inflation expected to fall below target range

8:11 am on 19 January 2015

Economists are expecting figures out this week will show there was no inflation in the December quarter.

If they are proven correct when the statistics are published on Wednesday, it will mean annual inflation at 0.9 percent will be below the Reserve Bank's 1 percent to 3 percent target range.

Westpac economist Michael Gordon said the annual inflation rate could well come very close to zero in the early part of this year because of falling petrol prices.

He said the Consumers Price Index had quite strong seasonal patterns over the year and the December quarter figures are often weak.

"That's largely driven by food prices in particular, a lot of fresh food prices will tend to rise in winter and then they'll fall back in spring and summer and that's where the weak December quarter CPI readings tend to come from," said Mr Gordon.

He said the expectation of a flat outcome for the quarter would not reflect weakness and would in fact be one of the stronger readings in recent years.

Petrol prices would be a major factor over the next year, he said, and would have a dramatic impact on headline inflation.

Some of the impact would be captured in the December quarter figures but the real impact would come later.

"Petrol prices were down about five percent on average over the quarter ... so that'll have a little bit of a dampening impact on those figures but the real drama is going to come in the March quarter figures which are published in three months time.

"So far petrol prices are tracking about 16 percent lower and it really depends on where they end up over the next few months," said Mr Gordon.

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