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Quarterly inflation lower than expected

NZN 17/07/2016

New Zealand consumer prices rose less than expected in the June quarter as cheaper meat and domestic airfares offset a recovery in petrol prices.

It adds pressure on the Reserve Bank ahead of its unscheduled economic update on Thursday. The kiwi dollar dropped.

The consumers price index rose 0.4 per cent in the three months ended June 30, accelerating from a 0.2 per cent increase in the first quarter, Statistics New Zealand said on Monday.

That was below the Reserve Bank's forecast for a rise of 0.6 per cent. On an annual basis, inflation was 0.4 per cent, still below the target band's lower limit of 1 per cent.

The kiwi dollar dropped to US70.82 cents after the figures were released at 10.45am from US71.48c immediately before. The trade-weighted index tumbled to 75.61 from 76.26.

Petrol prices rose 5.3 per cent in the latest quarter as crude oil recovered some of last year's slump, although they were still down 8.1 per cent from a year earlier.

Vegetable prices were up 7.9 per cent in the quarter, while new house prices rose 2.1 per cent. Offsetting that, meat and poultry prices fell 2.7 per cent and domestic air fares were down 9.9 per cent, reflecting heightened competition on some local routes .

"Higher petrol and housing-related prices were countered by lower prices for meat and domestic air fairs," Stats NZ consumer prices manager Matt Haigh said.

Tradables inflation, which includes goods and services that compete with imported rivals, increased 0.6 per cent, turning around a 1.2 per cent drop in the first quarter, due to the pick-up in petrol prices. That would've been greater if the kiwi dollar hadn't appreciated during the period.

The New Zealand dollar has gained almost 8 per cent on a trade-weighted index basis in the past 12 months, making it difficult for the Reserve Bank to drive inflation back up within its target band while rising house prices have made governor Graeme Wheeler wary of cutting too much for fear of inflaming the property market.

The bank will provide an economic assessment on Thursday, and investors expect Mr Wheeler will use the opportunity to try to talk down the kiwi dollar.

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