Pump prices will fuel inflation

High fuel prices driven by Hurricane Katrina could push New Zealand's inflation close to 4 per cent this year - a five-year high, economists say.

Petrol prices cracked the $1.50 mark this week and have risen about a third since January as world crude oil prices have jumped from US$42 ($59) to US$70 ($100) a barrel.

Fuel costs account for about 3 per cent of consumer price inflation.

The Bank of New Zealand expects the generalised effects of fuel prices to add a whole percentage point to annual inflation, taking the headline figure to 3.8 per cent.

"Surging fuel prices have quickly become a real concern for New Zealand consumers and businesses," said BNZ senior economist Craig Ebert. "Those hoping it's just a temporary blip should think again."

New Zealand imports the bulk of its oil from overseas and, with the kiwi dollar weakening, further upward pressure is almost certain.

Higher fuel costs are expected to have a ripple effect on the broader economy.

The last time inflation hit 4 per cent was in 2000. The Reserve Bank's target band is 1 per cent to 3 per cent.

Economists believe the bank is caught between a rock and a hard place - high and rising inflation, but slowing economic growth.

Globally economic activity was already cooling as producers felt the pinch of surging oil prices and analysts say that will only be accelerated in the wake of Hurricane Katrina.

- NZPA