Inflation figures issued yesterday reflect a two-speed economy - an ebullient domestic sector and a subdued external one.
The consumer price index rose 0.6 per cent in the December quarter, pushing the annual rate up a notch to 2.7 per cent.
Inflation is much more evident in services thanin goods, and in the non-tradeables sectors, where prices are not disciplined by international competition or affected by the exchange rate.
Central and local government charges, for example, rose 0.9 per cent in the quarter and 5.4 per cent over the year.
A third of the December quarter's CPI increase is explained by a 10 per cent rise in international air fares, a seasonal phenomenon.
Domestic air fares fell 9 per cent, after the introduction of Air New Zealand's new fare structure on November 1.
The second largest contributor to inflation was construction costs, up 1.8 per cent in the quarter.
This is the largest rise since June 1996, and is consistent with the buoyant housing market and the accompanying increase in the number of building consents.
The effects of a stronger dollar are evident in falls in the prices of new and used cars and petrol.
Household appliance prices fell 3 per cent, the sharpest drop for 10 years.
This was because of the increase in competition from imports, aided by the stronger dollar, and because some "new" appliances such as DVD players have fallen significantly in price.
Non-tradeables inflation was 3.9 per cent for the year, the highest for six years, and tradeables inflation was 1.8 per cent.
Westpac economist Nick Tuffley said the make-up of the CPI increase means that the Reserve Bank would not mechanically react to the New Zealand dollar's rise. "Whilst the dollar is helping compress some prices, domestic inflation pressures remain persistent and strong, and could be accelerating in the hotspot of housing," he said.
