Low inflation is unlikely to concern the Reserve Bank when official figures are released tomorrow.
Economists are forecasting Consumers Price Index (CPI) inflation, the official measure, to be 1.8% for the year ended September, still below the Reserve Bank’s 2% mid-point.
ASB senior economist Mark Smith said rising petrol prices and a stronger near-term outlook for food prices were likely to explain much of the difference with the Reserve Bank’s 0.2% quarterly forecast and the 0.4% forecast from ASB.
"We expect the CPI to confirm domestic inflation pressures remain subdued outside of one or two pockets. While the outlook for economic activity remains constructive and the beneficiary of key supports, evidence of firming in inflationary pressures is mixed at best."
In such an environment, and given the number of downside risks still lurking in the background, there was plenty of sense in the Reserve Bank holding the pause button on official cash rate changes for a while longer, he said.
Construction costs continued to be a key source of inflation, reflecting high construction demand.ASB expected annual construction cost inflation to stay up about 6%, more than thrice the headline inflation rate.
Combined with a 3% rise in rates in the quarter and higher rents, the housing component accounted for more than half of the inflationary pressures in September, Mr Smith said.
Fruit and vegetable prices remain high after weather-related spikes earlier this year. Grocery prices had also risen more than 1% in the quarter, largely from higher dairy prices.
Outside construction and food, the underlying inflation picture looked more benign.
Pricing pressure remained soft in the retail sector as online competition continued to weigh on the pricing power of physical store retailers.Annual dwelling rental inflation was expected to remain modest, despite strong population growth.
Statistics New Zealand’s Consumer Price Inflation was due at 10.45am.
The Reserve Bank’s measure of core inflation, which would be released at 3pm tomorrow, was expected to show core inflation sitting at 1.4%, well below the headline rate, Mr Smith said.
Looking ahead, the annual consumer price index inflation looked set to fall towards the lower boundary of the inflation target by early next year.
ANZ senior economist Phil Borkin said headline inflation would continue to be thrown around by swings in tradeable inflation in coming quarters, particularly by movements in retail fuel prices.
Petrol would make a positive contribution to the December quarter CPI.
"We still retain the view domestic inflation will rise and broaden in time. That is largely predicated on the belief wage inflation will lift gradually off lows, and increased fiscal spending will provide an inflationary impulse."
At a glance
• Quarterly inflation expected to be 0.4%.
• Annual inflation forecast at 1.8%.
• Official cash rate on hold until early 2019.
• Domestic inflation expected to rise eventually.
