Economists eye inflation figures with caution

Economists eyed today's inflation indicators with caution, as the quarterly Consumer Price Index (CPI) rose by 1.0 per cent.

The June quarter increase mirrored private sector forecasts and took inflation for the year ending June to 2.8 per cent.

Economists had on average expected a 2.7 per cent rise in inflation.

"Overall it's a reminder that inflation is certainly something the Reserve Bank needs to keep an eye on," said BNZ treasury economist Craig Ebert, referring to the Reserve Bank's next review of interest rates.

A number of economists said the figures reinforced the likelihood of a rise in the official cash rate, the basis for interest rates.

"...The bottom line is that it was a high quarter and took headline inflation to just short of the three per cent line so you've got a starting point for an inflation outlook that's at the top end and likelihood that it's going to stay that way for a few quarters yet," Robin Clements, chief economist at UBS Warburg said.

"I think initially you'd have to say this number does add, or cement in if you like, the likelihood of an August increase."

Mr Ebert said his bank too believed a 25 basis point rise was likely on August 14.

"A month or so ago, there was a fairly clear view that interest rates would go up. Since then, the currency has done most of the work for the bank...The market seems to be jumping on that idea as well and it's been helped along by what's happening around the globe.

"So it's created a lot of doubt about how much further the Reserve Bank have got to go. We tend to side with the view they do have a bit more to do. Part of it's the domestic growth story."

Mr Ebert said that even when some of the more volatile elements were stripped out of today's figures, prices were still "running at least at 2.5 per cent in some cases 3 per cent and that seems to be around about where core inflation seems to be running as well".

Statistics New Zealand said higher prices for petrol and international air travel were the main contributors to the quarterly increase, although it was partly offset by falling food prices, especially for fresh fruit and vegetables.

The June food price index fell by 0.3 per cent compared with the previous month.

- NZPA