Inflation picked to pass 4pc this year
Economists expect inflation to rise on average 1 per cent in the three months to December, pushing inflation for the year to 3.1 per cent, exceeding the Reserve Banks target range of 1 per cent to 3 per cent.
But inflation is expected to push higher this year.
The latest figures are due on January 17, with the cost of fuel the main reason for inflation surging from 1.8 per cent in the year to September.
The bank was forecasting inflation to be down to 3 per cent at the start of 2009.
Given how prolonged the period of high inflation is likely to be, interest rate cuts look like less of a 2008 story … with March 2009 a more conceivable start to the eventual easing cycle, ASB chief economist Nick Tuffley said.
But Westpac chief economist Brendan Donovan said the outlook was more worrying.
We think annual inflation is headed for 4 per cent through 2008.
That compared with the Reserve Banks forecast of 3.5 per cent in the third quarter of this year.
Mr Donovan said the central bank was yet to incorporate the inflationary effects of the Governments emissions trading scheme, which could add a full percentage point or more to inflation over the next three years.
The Reserve Banks inflation forecasts also include what we think is a conservative estimate of the inflationary effects of the upcoming regional petrol tax, he said.
Then there are likely ongoing food and energy price increases and increasing ACC levies.
Mr Donovan said transport prices would be the main contributors. Up 2.6 per cent, they would contribute 0.45 percentage points.
Housing-related costs would rise 0.9 per cent driven by higher rents and annual increases in local authority rates.
Food prices would rise 1 per cent, with higher prices for dairy products, meat and poultry out weighing lower fresh fruit and vegetable prices.
Non-tradable prices were expected to rise 0.9 per cent for the quarter, taking it to 3.9 per cent for the year, just above the Reserve Banks forecast of 3.8 per cent.
Higher fuel and food prices would drive tradable inflation to 1.2 per cent for the quarter and 2.1 per cent for the year.
However, the strong New Zealand dollar would keep clothing and household content prices relatively flat.
Mr Tuffleys tips were in line with Reserve Banks expectations for the year to December 2007, but he agrees with Westpac that inflation will go higher than the central bank forecasts in 2008.
Inflation could be above 3 per cent through to the end of 2009 and hover near 3 per cent into 2010 as the phased introduction of the emissions trading scheme boosted fuel and energy costs.
The Reserve Bank was also underestimating the emissions trading schemes impact.
In Australia, thoughts of an interest rate rise have returned as its economy continues to accelerate.
RBC Capital Markets senior currency strategist Sue Trinh noted anecdotal evidence of higher consumer spending in the lead-up to Christmas.
The Reserve Bank of Australia would have moved in December if not for the uncertainty around global financial markets and the main banks raising interest rates independently of the bank, Ms Trinh said.
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