Inflation vanishing act bumps NZ dollar

The dollar in your pocket is worth just as much as it was three months ago, even if it might not seem like it because of rising prices for basic living costs such as food and rent.

Statistics New Zealand reported yesterday that the consumer price index didn’t increase at all in the three months to June, bringing the annual inflation rate down from 2.2 per cent to 1.7 per cent.

Banks had been revising down their expectations of the annual inflation rate in recent weeks to somewhere between 1.8 per cent and 1.9 per cent – but hadn’t expected the quarterly rate to drop to zero.

In ‘‘seasonally adjusted’’ terms inflation came in at ‘‘negative 0.1 per cent’’, Statistics NZ said.

Currency traders reacted immediately yesterday by sending the New Zealand dollar down half a cent against the US dollar, to US72.7 cents.

Westpac said the inflation figure would put a ‘‘severe dent’’ in market expectations that the Reserve Bank would start hiking the official cash rate (OCR) from its current level of 1.75 per cent by the middle of next year.

But ASB said it still expected a rise in the OCR late next year.

Falling oil prices helped suck all the wind out of inflation, but the prices for many basic items did go up. Meanwhile, consumer technology goods such as televisions, radios and personal computers fell in price on average.

‘‘Household basics like rent, food, and electricity all hit consumers’ pockets harder this quarter,’’ Statistics NZ prices manager Jason Attewell said.

‘‘Offsetting these price rises were falls in domestic airfares and petrol prices – which fell on average by 4 cents a litre.’’

ANZ said prices for ‘‘necessities’’ were moving at a different speed to other goods and services, ‘‘with the prices for the former items generally rising, but prices for more discretionary-type spending falling’’.

The Reserve Bank had forecast in May that yesterday’s annual rate would come in at 2.1 per cent.

But that was before the latest dip in oil prices, evidence that a $23 million boost for the hospitality industry from the British and Irish Lions rugby tour did not spill over into the wider retail sector, and the further strengthening of the New Zealand dollar, which is reducing the price of imports.

Although the absence of inflation during the three-month period will be seen as helping to justify the Reserve Bank’s neutral stance on the OCR, banks have warned that mortgage rates will continue to edge up regardless.

That is because of rising rates overseas which are increasing their borrowing costs.