Consumer prices were up 0.3 percent in the March 2009 quarter, with annual CPI falling slightly to 3.0 percent.

On the quarter, prices fell in the transport, communication, recreation and culture and clothing and footwear subgroups. International air travel was down 16.5 percent, diesel was down 19.2 percent and petrol was down 1.0 percent on the quarter.

Pushing prices up this quarter was food and alcoholic beverages and tobacco. If food prices had not increased, then the CPI would not have changed on the previous quarter. The excise duty for cigarettes and tobacco rose 5.07 percent in January, explaining the increase in alcoholic beverages and tobacco. Car prices recovered, with second hand car prices up 3.5 percent and new car prices up 3.7 percent.

On the year, the 3.0 percent increase was driven by the food group, which increased by 8.8 percent and accounted for half of the CPI increase. The transport group prices were down 2.6 percent on the year reflecting a 9.3 percent drop in petrol prices. Nine of the 11 groups made upward contributions, with the communication group joining transport as the only two where prices fell on the year.

On the year the most significant individual upward contribution were from electricity (up 7.5 percent), house rents (up 2.1 percent), and ready-to-eat food (up 6.2 percent). Joining petrol as the most significant downward contributions were audio-visual equipment (down 20.8 percent) and second-hand cars (down 4.5 percent).

The data suggests that an economy in recession is taking the puff out of prices. Prices are staying high in the area of needs (food prices, rent) and falling in the areas of conspicuous consumption (audio-visual equipment, overseas holidays). A lower petrol price has also helped to lower the CPI.

We can expect this decline in prices to continue over the next year with the recession playing its role. Further easing of monetary policy will also contribute.

However, we won’t see the official CPI falling below two percent until the September 09 quarter results when the high June and September 08 quarters fall out of the equation. Then we will see a CPI at the very bottom end of the RBNZ target rate.

Once the recession is over we can expect a fairly rapid bounce-back in prices.