With the use of the New Zealand dollar as the national currency, the long-term inflation rate in the Cook Islands tends to follow the rate in New Zealand.
The Reserve Bank of New Zealand (RBNZ) has adopted an inflation target of 1% to 3% on average over the medium term. Nevertheless, inflation in the Cook Islands tends to be more variable than in New Zealand, reflecting the narrow economic base and heavy reliance on imports. In year average terms, prices in-creased by 7.3% and 5.8% in 2000-01 and 2001-02 respectively, reflecting increased fuel prices. Since that time they have remained within the RBNZ range.
Preliminary data for the September quarter 2005 shows that consumer prices increased by 0.2% in the quarter to be 2.1% above the level in the September quarter 2004. The largest contributions came from increased fuel and electricity prices, with the household fuel and light sub-group con-tributing 0.7 percentage points and the motor fuel and oil sub-group contributing 0.4 percentage points to the inflation rate over the year.
The removal of most import levies from 1 July 2006 is projected to lead to a one-off reduction in consumer prices of around 2.2 percentage points, assuming that the reduction is fully passed on to consumers and that there are no compensating increases in other indirect taxes. Apart from this reduction, the projections assume as usual that inflation will increase by 2% per year over the medium term, the mid point of the RBNZ range.
The projections are based on stable exchange rates and world oil prices. Obviously, significant changes in these variables would affect the projections.
Complete report: MFEM, Half Year Economic and Fiscal Update