Deflation looming

New Zealand’s economy may be in its first six-month period of deflation in more than a decade, with weak crude-oil prices and global over-capacity pushing out prospects of interest-rate hikes into next year, according to BNZ. Economists at bank are forecasting the 0.2 per cent fall in the consumers’ price index (CPI) in the December quarter will decline by 0.3 per cent in the first three months of this year – resulting the first two consecutive quarters of deflation since 1998-99 and Asia’s financial crisis. However, using the Reserve Bank’s long-term series for CPI excluding interest rates, New Zealand hasn’t seen more than one-quarter of deflation since the Great Depression in the early 1930s. Stephen Toplis, head of research at BNZ, says deflation during the current cycle isn’t like the eurozone, where consumer prices dropped by 0.2 per cent last year and where demand has fallen. This compares to the Kiwi economy, which operating at or above capacity with the housing market steaming ahead and new Zealanders showing no inclination of curbing spending. Toplis says: “Normally when you talk about deflation, the wheels are falling off and there’s a downward price spiral, but there’s no evidence of that in New Zealand. The single biggest thing is accessing world goods at low prices. There is no evidence of retrenchment in activity due to pressure on the general consumer price level.” BNZ’s forecasts for deflation are south of the Reserve Bank’s for December. These were for the CPI to increase by 0.1 per cent in the fourth quarter 2014 and 0.4 per cent in the current quarter. Graeme Wheeler, the central bank’s governor, said in last month’s monetary policy statement that modest inflation pressures suggest growth “can be sustained for longer than previously expected with a more gradual increase in interest rates”. With inflation “below target in most of the advanced economies due to spare capacity and declining commodity prices, monetary policy is expected to remain very supportive for some time”. Brent crude oil has fallen below US$50 a barrel for the first time since 2009 on speculation the Organisation of Petroleum Exporting Countries’ decision not to cut production due to sliding prices will see them drop further – especially with more self-sufficiency in the US, and weaker demand in Europe and China. The fall in the price of oil, and fuel, has been a gain for consumers. There are also structural changes including the impact of technology. This has seen prices decline for household appliances, cars, telecommunications equipment and computers.