Inflation 0.5pc up for quarter

By BRIAN FALLOW economics editor

Inflation remained well behaved in the September quarter, recording a 0.5 per cent rise which kept the annual inflation rate steady at 1.5 per cent.

The data shows the ever-widening gap between the tradeables sector, exposed to international prices and the exchange rate, and the non-tradeables sector, which is riding a wave of strong domestic demand.

But there is scant sign of inflation spilling over from the housing hotspot. Price increases are less widespread than they have tended to be over the past two years and measures of trend inflation are improving.

The quarterly increase of 0.5 per cent was less than the 0.8 per cent market economists and the Reserve Bank had expected.

The biggest upward contributor was petrol, which rose 7.1 per cent, reversing most of the June quarter's fall. Construction costs climbed for the 18th consecutive quarter, the 1.8 per cent rise pushing the annual increase to 6.9 per cent, a seven-year high.

Local body rates jumped 7.2 per cent, the largest increase since June 1990. Electricity prices rose 3.2 per cent in the September quarter. They have risen 6.5 per cent over the past year and 13 per cent over the past two years.

The main downward contribution to inflation in the last quarter came from international air fares, down 12.6 per cent as the normal seasonal fall was boosted by transtasman specials in the lead-up to the reductions offered from October 29, Statistics New Zealand said.

Used car prices fell 3.8 per cent.

In all, 353 of the 672 items in the CPI basket rose in price and 204 fell. Adjusted for the proportion of household spending those items represent, 63.7 per cent of the CPI basket rose and 26.8 per cent fell.

That is less widespread inflation than the preceding eight quarters, when on average 65.7 per cent of the basket rose and 25.2 per cent fell.

Other measures also suggest inflation is becoming less of a problem as the economy slows.

But when split into its internationally tradeable and non-tradeable components, the CPI starkly illustrates the two-speed nature of the economy, with a buoyant domestic sector and a struggling export sector.

Annual non-tradeables inflation rose to 4.1 per cent from 3.8 per cent in June. But in the tradeables sector prices fell overall, 0.9 per cent compared with a fall of 0.6 per cent in June, reflecting disinflationary pressure from the rest of the world.

Westpac chief economist Brendan O'Donovan said: "The awkward standoff between strong domestic inflation pressures, largely housing, and soft external pressures, particularly from the high New Zealand dollar, continues."

He expected the Reserve Bank to stick to its "nervously neutral" stance when it reviewed interest rates again next week.