Westpac Institutional Bank Team
Westpac Institutional Bank
Last week’s December quarter 2014 Consumer Price Index (CPI) was softer than expected, with prices falling 0.2% on a quarterly basis and annual inflation dropping to 0.8%.
The quarterly decline is not in itself cause for alarm – seasonal price patterns mean that the CPI falls more often than not in December quarters. However, the downside surprises relative to our forecast were fairly widespread across tradable items, suggesting that the strong exchange rate is continuing to suppress inflation.
Construction cost inflation was a notable, but isolated, pocket of strength. The price of building a new home was up 5.4% on a year ago, the biggest annual increase since March 2008. The massive post-quake rebuild job in Canterbury, combined with a push to make up for years of under-building in Auckland, was always expected to strain the capacity of the construction industry, and the consequences are now plain to see.
Inflation may be low now, but the real fireworks will come next quarter. The recent plunge in fuel prices means that annual inflation will fall very close to zero in the March quarter, and may just barely scrape back above one percent by year-end.
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