A fall in the cost of living might not translate into more spending by consumers, according to a business lobby group.
Photo: AFP
Consumer prices fell 0.2 percent in the final three months of last year. The Bank of New Zealand forecasts consumer prices will drop 0.6 percent in the next quarter, which would push the annual rate of inflation to below zero.
So far, businesses have seen no change in the level of consumer demand, however this could change, according to the Employers and Manufacturers Association in Auckland.
Deflation was just as bad as high inflation, said chief executive Kim Campbell, and although goods may seem cheaper, people don't end up buying more.
"People put their wallets away, because they don't want to spend now, because they think it's going to be cheaper later." In a deflationary economy, disposable incomes do not rise, he said.
However Auckland retailers say consumer demand is not slowing.
Briscoe Group managing director Rod Duke said the exchange rate rather than inflation was the main concern for importers.
"From my experience in a country like New Zealand where the vast majority of products - that is durables - is imported it's more about the cost of raw materials and the denominated currency that you choose to buy in, which is invariably not New Zealand dollars."
Mr Campbell said the global situation posed a serious challenge to New Zealand's economy.
"We have a very large skilled low-cost labour force all around the world. There's tremendous pressure on wages so we're not seeing any real labour cost rises. In other words, real disposable income around the world is not rising."
Stephen Sinclair, head of skincare and candle firm Trilogy International, said his company was not worried about low inflation.
"Our game is getting growth. The impact of those inflationary or deflationary pressures, market to market, is not something that's impacting us."
The strengthening New Zealand dollar was a worry though, but the company had hedged against it rise, Mr Sinclair said.
The high New Zealand dollar was driving down the cost of living as imported goods prices fell, according Westpac chief economist Dominick Stephens.
"If it does end up as deflation - which I'm not necessarily sure it will - it could be termed good deflation. What New Zealand is experiencing is here is a reduction in its import bill," he said.
"It is a reduction in the cost of living, and an increase in real wages. So the modest wage increases that some people are getting at the moment are going to go further with cheap petrol - that's an unambiguous positive for the New Zealand economy."
Mr Stephens said if inflation remained low, fixed mortgages could fall, and that could mean house prices would keep rising.
He said any prospect of the Reserve raising the OCR was now negligible.
