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. ┬áMore 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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  • Cadwallader

    The Greenies will demand an inquiry. Labour will claim it is a crisis. Both of the aforementioned gangs will blame JK.

    • Murray Smith

      And the most educated of them will blame John Keys.
      Dang I hate those idiots who turn the Prime Minister into a plural !!

  • paul468

    A lot more than a $4 saving to fill your tank up, visitors arrived here on the weekend said $90ish for a fill instead of around $130

    • Wallace Westland

      Yep filled the work ute (diesel) up the other day, $57 (fuel light had been on for a while too) instead of the normal $78-81 range it’s always been in.

    • Nic C

      Yip… mine was consistently $140ish per tank… noticed the other day it was $123 from dead empty.

  • Grizz30

    Confused why this is a risk for local growth. Oil/petrol is largely an imported product. More money in the pocket, more you are likely to spend on other local product or even invest in local businesses.

    • Aucky

      Spot on Grizz. Our personal gas accounts were $158 lower than normal this month and our mileage about the same. I would have washed the house myself this weekend but I’m shouting myself a commercial wash with the savings on my gas. Just a miniscule example of how the positive effects will create employment opportunities at a local level.

  • cows4me

    Will this increase the fuel tax take due to more fuel being used? I take it the tax stays the same the product is just cheaper?

  • Asian_driver

    I guess a responsible Reserve bank would have to put up interest rates to compensate for the low inflation

  • Disinfectant

    I was listening to Duncan Garner this evening saying that about 48% of the worlds wealth was owned by 1% of the people.
    And all we got was that this was dreadful and that the solution was re-distribution.
    In my view that is not the solution.
    The solution is participation. A classic example is the constraint from participation in the housing market. If the supply of land had no restriction more people would be able to participate as the price would come down. And this principle goes for nearly everything else.
    So we continue to have huge housing price inflation (and everyone needs a house) but the other deflationary parts of the economy do not entirely compensate.

  • andrewo

    Deflation – coming to a country near you

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