Inflation creeps closer to top of range

By BRIAN FALLOW


Building costs and an oil-fuelled increase in air fares have pushed inflation closer to the top of the Reserve Bank's target band.

Statistics New Zealand said the consumers price index rose 0.6 per cent in the September quarter, pushing the annual rate to 2.5 per cent. That is up from 2.4 per cent in June and 1.5 per cent in March.

The bank's mandate is to keep inflation between 1 and 3 per cent on average over the medium term. Its September forecasts have inflation at or above 3 per cent all through next year and for the first half of 2006 but, since then, the New Zealand dollar has strengthened more than the bank assumed, which should act as brake on growth and reduce the risk of imported inflation.

Another increase in the bank's official cash rate, from 6.25 to 6.5 per cent on October 28, is regarded as a virtual certainty, but financial market pricing implies only a 40 per cent chance of another rise in December.

Construction costs, up 1.9 per cent in the quarter and 9 per cent over the year, accounted for a third of the latest increase in overall inflation.

Construction costs have risen for 22 quarters in a row and been a major contributor to "non-tradables" inflation, which reflects those parts of the economy unaffected by international prices or the exchange rate.

Non-tradables inflation was 1 per cent in the quarter; the annual rate eased back to 4.7 per cent from 5 per cent three months ago.

Westpac chief economist Brendan O'Donovan said non-tradables inflation was the Reserve Bank's preferred guide to trend inflation at present, because volatility in the exchange rate could knock around other statistical estimates of the underlying inflation picture.

He said this week's quarterly survey of business opinion by the New Zealand Institute of Economic Research, which showed near-record pressure on the use of physical plant and of labour, would have the bank concerned that non-tradables inflation would linger at elevated levels.

But Deutsche Bank chief economist Ulf Schoefisch said that with activity in the residential building sector peaking and the rental market softening, the housing sector's contribution to inflation would gradually slow over coming quarters, bringing non-tradables inflation below 4 per cent by the March quarter next year.

Nearly a third of the increase in the CPI arose from high international and domestic air fares, up 5.9 and 3.7 per cent respectively, partly reflecting higher fuel surcharges.

Schoefisch said the rest of the CPI showed benign inflation pressure helped by the strength of the New Zealand dollar, which offsets any imported inflation pressures.

Petrol prices were up 0.6 per cent in the quarter.

"While average service sector prices rose, new and used car prices fell, the cost of food was down, and prices of household appliances continued to decline," he said.

Nearly half of the 672 items in the CPI basket rose in price in the September quarter.