Bad news for borrowers as inflation rises
The dramatic rise in the Consumer Price Index from 1.8 per cent in the September quarter had been expected, but the quarterly rise of 1.2 per cent was above the 1 per cent average forecast by private sector economists and even the Reserve Banks more pessimistic 1.1 per cent stab.
There was no surprise higher fuel prices played a big part in the rise but the effect of other commodity prices, particularly food, played almost as significant a part.
Even without petrol price rises, the index would have risen 1 per cent in the quarter, Statistics New Zealand said.
UBS economist Robin Clements said Reserve Bank would be squirming with the headline rate above the Government-set 1 to 3 per cent target.
However, like other economists, he seized a small silver lining, the slowing in domestic-based inflation to 3.5 per cent, the lowest in four years.
That suggests the domestic side of inflationary pressures might be calming down and thats consistent with the soft housing data we saw yesterday, he said.
RB governor Alan Bollard last month forecast inflation would remain above the banks target band all this year.
Westpac chief economist Brendan Donovan believes the bank will have to hike interest rates twice more this year to contain second round inflation effects arising from higher fuel prices.
But others believe the international credit crisis and the likelihood of recession in the United States will offset local inflation pressures.
Local investors have been fleeing riskier investments such as shares and finance companies and swamping banks with cash, putting pressure on banks to cut interest rates.
One of the big factors fuelling inflation, the wealth effect of higher housing prices, has come well off the boil. Yesterday, Real Estate Institute (REINZ) figures showed the median house price fell 2 per cent in December and sales fell by a third.
Rather than rise on todays higher than expected data, the New Zealand dollar continued its slump of the last two days and was down almost US3c from a one-month high touched on Monday.
During the December quarter, prices rises in the transport group (up 3.2 per cent) made the most significant contribution to the index rise.
International air fares rose 11.9 per cent but prices for domestic fares fell 4.6 per cent thanks to the entry of Pacific Blue into the local aviation market.
The 1.5 rise in food prices made a significant contribution, with higher groceries (up 3.4 per cent), particularly dairy products, the big factor.
The Food Price Index, also released today, was up 0.9 per cent in December and 5.4 per cent over 2007.
Prices for the housing and household utilities group rose 0.9 per cent in the quarter, pushed up mainly by higher prices for the purchase of new housing (up 1.3 per cent), electricity (up 1.2 per cent) and rentals for housing (up 0.5 per cent).
Green co-leader Russel Norman said the Government needed to rethink its love affair with motorways, giving the role rising petrol prices had played in inflation.
The Government needed to act to insulate New Zealand from the ever-increasing price of oil by investing in modes of transport that were less dependent on oil, Dr Norman said.The partys economics spokesman also said that with Dr Bollard charged with maintaining the inflation ceiling, there was little hope interest rates would come down, given todays announcement.
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