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Prices and Costs

Consumer price inflation declined over the 1990s as monetary policy directed at maintaining price stability (introduced in 1989) took effect. Since September 1991, inflation has averaged 2.2% per annum. Inflation peaked at 5.1% in the year to September 2008 as a result of high fuel and food prices, before easing back to within the Reserve Bank's 1% to 3% target band during 2009.

Patterns of inflation vary between internationally tradable and non-tradable goods and services. Continued strength in the housing market and high energy costs, coupled with high capacity utilisation, contributed to non-tradables inflation averaging 4.3% from 2004 to 2007. A weakening housing market contributed to lower growth in residential construction costs and rents by the end of 2008, while easing capacity constraints reduced pricing pressures across the non-tradable sector more generally, with annual non-tradable inflation falling to an 8-year low of 2.3% in December 2009.

Tradables inflation remained low through to the end of 2007 due to the high New Zealand dollar relative to historical levels. Rapidly rising oil prices over the first half of 2008, coupled with increased food prices, resulted in higher tradables inflation through until September 2008, when it peaked at 6.3% on an annual basis. Since then, tradable inflation has eased considerably, with the most significant downward contribution coming from lower fuel prices, resulting in annual tradable inflation of 1.5% in the year to December 2009.

Annual inflation measured 2.0% in the year to December 2009. Inflation is expected to increase slightly, in line with the economic recovery, but remain within the Reserve Bank's target on average over the medium term. The moderate inflation outlook reflects higher tradable inflation (owing to an expected lower exchange rate), offset by lower non-tradable inflation (reflecting continuing spare capacity in the economy).

A weakening exchange rate, coupled with record-high oil prices, drove producer price inflation for inputs up from 0.7% in June 2007 to 13.6% in September 2008. In the year to September 2009, the rate of producer price inflation eased rapidly to 5.8%, reflecting significantly lower oil prices. Input price inflation is expected to remain subdued in the near term, reflecting the rapid appreciation of the currency since March 2009.

Wage growth trended upwards in the eight years to 2008, reflecting a tight labour market and a period of higher than average inflation. Growth in the index of salary and ordinary-time wage rates peaked at a record 3.9% in the year to September 2008 before declining rapidly over the following year, recording just 2.1% in the year to September 2009. Growth rates are expected to continue to soften over 2010 and remain under 3% in the medium term, consistent with unemployment remaining higher than in recent years and the expected modest inflation over the forecast horizon.

The following table shows on a quarterly basis the Terms of Trade Index, the Producers Price Index, the Consumers Price Index, and the Labour Cost Index and, in each case, the percentage change over the same quarter of the previous year:

Prices and Costs
Terms of Trade
Index (1)
Producers Price
Index (2)
Consumers
Price Index (3)
Labour Cost
Index (4)
2005 March 1,105 4.5% 1,185 3.7% 953 2.8% 875 2.5%
June 1,091 1.0% 1,210 3.9% 962 2.8% 881 2.6%
September 1,087 0.9% 1,240 5.4% 973 3.4% 891 3.1%
  December 1,060 (1.9%) 1,251 5.5% 979 3.2% 898 3.1%
2006 March 1,069 (3.3%) 1,264 6.7% 985 3.3% 904 3.2%
June 1,097 0.5% 1,301 7.5% 1,000 4.0% 909 3.2%
September 1,073 (1.3%) 1,319 6.4% 1,007 3.5% 919 3.2%
  December 1,100 3.8% 1,305 4.3% 1,005 2.6% 927 3.2%
2007 March 1,117 4.5% 1,296 2.5% 1,010 2.5% 932 3.2%
June 1,122 2.3% 1,312 0.8% 1,020 2.0% 938 3.2%
September 1,163 8.4% 1,344 1.9% 1,025 1.8% 947 3.1%
  December 1,197 8.8% 1,361 4.3% 1,037 3.2% 957 3.2%
2008 March 1,247 11.6% 1,390 7.3% 1,044 3.4% 964 3.4%
June 1,242 10.7% 1,473 12.3% 1,061 4.0% 972 3.6%
September 1,230 5.8% 1,527 13.6% 1,077 5.1% 984 3.9%
  December 1,218 1.8% 1,493 9.7% 1,072 3.4% 991 3.6%
2009 March 1,185 (5.0%) 1,455 4.7% 1,075 3.0% 997 3.4%
June 1,074 (13.5%) 1,455 (1.2%) 1,081 1.9% 1,000 2.9%
September 1,061 (13.7%) 1,439 (5.8%) 1,095 1.7% 1,005 2.1%
December N/A N/A N/A N/A 1,093 2.0% 1009 1.8%

(1) Base: June quarter 2002 = 1,000.

(2) All industry inputs. Base: December quarter 1997 = 1,000.

(3) Base: June quarter 2006 = 1,000.

(4) All industry ordinary time salary and wage. Base: June quarter 2001 = 1,000.

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