The generally as-expected tone of recent data suggests we won’t see a significant change in language from the RBNZ in Thursday’s OCR review. But reading between the lines, the RBNZ have a tremendous amount of work to do over the foreseeable future.
Consumer prices fell 0.2% in the December quarter, with base effects taking the annual inflation rate up to 2.0%. This was a little weaker than we expected, but right in line with the RBNZ’s forecasts. The major contributor was a 2.4% fall in food prices, with fruit and vegetable prices reversing a winter spike that was due to poor growing conditions.
Non-tradables inflation – the component that was stubbornly persistent through much of the last decade – was a touch softer than the RBNZ expected, with a rise of just 0.1%. Annual non-tradables inflation fell to 2.3%, the lowest it has been since 2001. The recession that ended in mid-2009 has definitely reduced domestic inflation, with the maximum effect felt in Q4 last year.
There was one important exception to this theme. Inflation in the “home ownership” category, which reflects the cost of building a new house, accelerated to 0.4% from 0.1%, instead of falling to zero as we expected. That’s important as the persistence of construction-cost inflation was a key driver of inflation in the last economic cycle. We expect construction cost inflation to ramp up again in 2010, as the residential building industry recovers.
