Inflation and interest rates look set to fall faster and earlier than expected this year but the latest predictions come with a warning for households that there will be some hidden barbs along the way.
The barbs will include rising energy costs and higher costs for imported goods because of the forecast fall in the value of the New Zealand dollar.
While some food prices are set to fall in line with a deteriorating outlook for world commodity prices, reports yesterday that dairy company Fonterra has lifted the price of its dairy products for food suppliers will take the gloss of some of the good news.
Inflation fell to 3.4% in the December quarter after reaching an 18-year high of 5.1% in September.
The rate of inflation, as measured by Statistics New Zealand's consumer price index, is back to where it was last March, still above the Reserve Bank's target range of 3%.
Westpac chief economist Brendan O'Donovan said weak economic conditions would see inflation back within the central bank's target range next quarter and below the bottom of the 1%-3% band by September.
"The Reserve Bank cannot change history, so there is little point reacting to last year's inflation. Focus is where it should be on the economic outlook and the implications for inflation ahead."
The data out yesterday would not change the way the central bank operated.
Its focus would remain on the international situation, weak domestic economy and low inflation outlook, he said.
The economy was in reverse and with spare capacity increasing and the labour market deteriorating, Mr O'Donovan expected further substantial cuts in interest rates, starting with at least 1% on January 29.
Westpac expected the official cash rate to fall to 2.5% this year.
A close look at the December quarter statistics provided some interesting facts.
Lower petrol prices (down 22%) drove the overall 0.5% fall in inflation.
If petrol and diesel prices had remained constant from September to December, inflation would have risen 0.9%.
Outside of the fuel prices fall, inflation remained high.
Food prices rose 1.5% in the quarter and made the largest group contribution to inflation.
Looking forward, food inflation is expected to diminish quickly given large falls in international commodity prices to date.
Non-tradeable inflation, which includes housing and rent costs, rose stronger than expected but the softening trend in construction costs will encourage the Reserve Bank.
However, another round of increases in electricity prices and other non-tradeable inflation will not be welcome.
Electricity prices rose 2% in the quarter.
In addition, local and central government charges rose 1.2% to be up 6.5% on a year ago.
That was the highest rate of annual growth since 2004.
A 0.9% increase in clothing and footwear prices, and a 0.5% increase in the household contents and services group were contrary to the anecdotes of widespread discounting by retailers.
Mr O'Donovan said he suspected that would be the case as negotiated discounts were not typically picked up by the CPI and the lower dollar was putting upward pressure on the prices of imported goods.
At a glance
Inflation 3.4% in December, down from 5.1% in September.
Fall due mainly to lower petrol prices.
Food prices rose 1.5% in quarter.
Inflation set to fall to zero by September.
Official cash rate cut to 4% next week.
