Are you ready for no inflation at all?

Because of the oil prices crashing around our ears, actual inflation may be trending close to zero in a few months.

Falling petrol prices driven by a sharp fall in the cost of oil are expected to cause this week’s December inflation figures to be flat.

And economists say the consumer price index (CPI), due Wednesday, will probably show annual inflation slightly below the Reserve Bank’s target band of 1 to 3 per cent.

But the real impact of falling petrol and diesel prices, which have both dropped more than 40 cents a litre since October, is expected to be a “much more dramatic” impact on inflation for this year.

Economists expect subdued December quarter inflation data this week to drop annual inflation figures below 1 per cent for just the second time in the last few years.

Westpac economist Michael Gordon said lower fuel and food prices would be balanced out by higher airfares and housing-related price rises.

But while the recent plunge in oil prices would have a small impact on December’s CPI data, it was expected to cement the “low-inflation story” for 2015.

“The real fireworks will come in the March quarter,” Gordon said.

“Based on current fuel prices, annual inflation could come very close to zero in the early part of this year.”

But apparently this doesn’t make the Reserve Bank governor any less stingy…

Lower petrol prices were considered a risk for local growth prospects and would give the Reserve Bank greater scope to maintain interest rates at 3.5 per cent for longer, [HSBC chief economist Bloxham] said.

Inflation during 2015 was also expected to be lower as a result, to 1 per cent from 1.8 per cent.

“Given that petrol accounts for 5 per cent of the New Zealand consumer’s basket, this is expected to knock 0.5 to 0.8 percentage points off the headline CPI,” Bloxham said.

ASB economist Christina Leung said the influence of lower petrol prices would show a flat outcome in December’s inflation figures, but would be more pronounced this year.

The drop in petrol prices would take 0.3 per centage points of the fourth quarter CPI, she said, and would be bigger in the first quarter of 2015.

“We assume crude oil prices will remain low over much of 2015, which results in a low headline inflation outlook for 2015.

“We now expect headline inflation will remain below the Reserve Bank’s inflation target band of 1 to 3 per cent over much of 2015.”

Leung said lower petrol prices would act like a tax cut for households, but the Reserve Bank would be interested in whether it flowed through broader prices and wages in the economy.

You just can’t win.  More money in your pocket means the Reserve Bank will keep the mortgage rates up to suck it out of your wallet so that you don’t go crazy and buy another house with the $4 you saved filling your tank up.


– Hamish McNichol, Stuff

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As much at home writing editorials as being the subject of them, Cam has won awards, including the Canon Media Award for his work on the Len Brown/Bevan Chuang story. When he’s not creating the news, he tends to be in it, with protagonists using the courts, media and social media to deliver financial as well as death threats.

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