Fourth quarter inflation expected to be low due to Covid-19 disruptions

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Disruptions caused by the ongoing pandemic are expected to be reflected in the fourth quarter inflation data to be released later today.

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Annual inflation was expected to be in a range of 1.0 to 1.4 percent, which was well below the midpoint of the Reserve Bank’s 1.0 to 3.0 percent target range (file image).
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Economists were expecting the December quarter Consumer Price Index to be flat or up slightly on the September quarter, in a range of 0.0 to 0.3 percent.

Annual inflation was expected to be in a range of 1.0 to 1.4 percent, which was well below the midpoint of the Reserve Bank’s 1.0 to 3.0 percent target range.

Westpac Bank economist Michael Gordon, whose inflation forecast is at the low end of the range, said the December quarter CPI was typically soft, mainly due to lower prices for fresh fruit and vegetables.

The absence of peak season international travel had put further downward pressure on inflation, although much of that was expected to be offset by a big rise in housing-related costs, he said.

“Rents I think are getting to more than 10 percent of the index now and they have been continuing to go up,” he said, adding the cost of new residential homes were also expected to rise in line with increases in the price of existing houses.

“The fact that we’ve seen the housing market really hot up in probably the last six months that’ll probably come through in terms of new build prices as well.”

Mangere Budget Services Trust chief executive Darryl Evans said many of the 11,000 it assisted last year were unable to cope with rising housing costs, leaving too little in the household budget to fill the shopping trolley with cheaper groceries.

About 63 percent of the trust’s clients were paying upwards of 65 percent of their income to a private landlord, he said.

“So if you’re living in a state house you’re paying 25 percent to the government and you’re treading water but if you’re paying 65 percent, then of course the armbands don’t keep you afloat.

“We’ve seen many people either lose rental property, or they overcrowd it by bringing in extended family.”

The situation is unlikely to get any better as the Institute of Economic Research’s most recent quarterly survey of business opinion indicates retail prices were likely to go up.

ANZ economist Liz Kendall, whose fourth quarter inflation expectations were at the top end of the range, said supply chain disruptions would be the main driver of price increases over the medium-term with inflation expected to rise above 2 percent by the middle of the year.

“Although we expect these cost pressures to be evident in the short-term, underlying that we think that inflation is still going to remain pretty modest and that it will increase quite gradually,” Kendall said.

“And for the Reserve Bank, with the starting point for inflation already very low, they’ll want to be really assured that inflation is going to return to their target over the medium term, so strategically for them it makes sense just to give a little bit more stimulus with one additional interest rate cut expected this year in May.”

Other bank economists were less sure about a need for a further cut to the OCR, with Westpac announcing yesterday it expected the central bank to hold the OCR at 0.25 percent for the foreseeable future.

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