Near-zero inflation expected

Inflation is likely to have been close to zero in the three months ending September, taking annual inflation to 0.1%.

Statistics New Zealand will release the Consumer Price Index, the official measure of inflation, tomorrow.

Both the ANZ and ASB predict a low inflation rate, which will put pressure on the Reserve Bank to cut the official cash rate next month.

The September CPI is expected to mark the eighth consecutive quarter of annual CPI below 1%.

ANZ senior economist Philip Borkin said that would do little to allay the Reserve Bank’s fears of persistently low inflation becoming embedded in price and wage-setting behaviour.

The September inflation result should mark the low in annual headline inflation.

The Reserve Bank’s midpoint target of 2% inflation was not expected to be reached until mid-2018, assuming a modest fall in the value of the New Zealand dollar.

The third quarter CPI figures were unlikely to stand in the way of a November OCR cut, he said.

ASB chief economist Nick Tuffley said the key driver behind the quarterly fall in inflation was the one-off reduction in ACC vehicle licensing fees.

Previous strength in the dollar, a further fall in petrol prices and falling rents in the third quarter also combined to weigh on inflation.

Construction costs were the sole strong spot in the current inflation story.

Construction costs lifted strongly in June and, as capacity pressures remained, he expected further price increases in September, Mr Tuffley said.

"Outside of the construction sector, price pressures remain elusive. Our forecast is slightly lower than the Reserve Bank’s August forecast of 0.2%. In our opinion, a 0.25% OCR cut in November is a given."

He expected domestic pressures would lift inflation as ongoing economic growth and a tightening labour market boosted non-tradeable inflation.

However, within a context of excess global capacity and a high dollar, tradeable inflation would continue to be a drag on headline inflation for some time yet.