Inflation tipped at 1.1pc - driven by food, rates

Inflation stats tomorrow are expected to show the rate running at an annual rate of 1.1pc. Photo / Herald on Sunday

Inflation probably quickened in the third quarter, led by a seasonal pickup in food prices and local authority rates in what will be the final period for the consumer price index to hold at historically low annual levels.

The consumer price index rose to 0.6 per cent in the three months ended September 30, double the second-quarter rate, according to a Reuters survey of eight economists. The annual rate rose to 1.1 per cent from 1 per cent.

Annual inflation is at the bottom of the Reserve Bank's 1 per cent-to-3 per cent annual target but that's likely to change by the final three months of 2012, with the bank predicting annual inflation to pick up to 1.9 per cent. That's because the drop in the CPI in the fourth quarter last year will have rolled off, while building costs are rising, partly reflecting the Christchurch rebuild.

"The confluence of forces that have helped to keep price pressures down for the last year or so are fading and we are now past the low point for annual inflation," Westpac senior economist Michael Gordon said in a note.

The high New Zealand dollar has contributed to the nation's tame inflation, by keeping a lid on the price of imports ranging from mobile phones and computers to motor cars and aeroplane parts. It has averaged 77.73 US cents so far this year, just above last year's average. For the two previous years, the average was 58.2 US cents, based on Reuters data.

"While the NZ dollar remains high, it is becoming less of a disinflationary force," Westpac's Gordon said.

The kiwi recently traded at 81.67 US cents, down from its high in September above 83 cents. The trade-weighted index, the central bank's preferred measure, was recently at 72.9, slightly above the average the bank is picking for the fourth quarter.

Both Westpac and ASB forecast the biggest increase for food prices last quarter. ASB estimates food prices jumped 1.1 per cent in the third quarter, led by a seasonal 12 per cent gain for fruit and vegetables which should abate in the fourth quarter.

But food prices won't be such a benign force in the year ahead. Drought in the US is likely to be felt by way of rising prices for grains and animal feeds, leading to higher prices for both dairy products and meat.

"We expect this will in turn flow through to higher prices at the retail level later next year," said ASB chief economist Nick Tuffley.

He cites housing shortages in Auckland and Christchurch for putting pressure on construction costs and rents while the continued impact of higher reinsurance changes is likely to drive up insurance costs.

The Reserve Bank also cited housing pressures in its monetary policy statement last month, where former governor Alan Bollard kept the official cash rate at a record low 2.5 per cent. But he also said the government's belt tightening, or fiscal consolidation "is constraining demand growth."

Bollard expects inflation will "settle near the mid-point of the target range over the medium term," meaning he is under no pressure to raise interest rates any time soon.

Economists are also expecting an increase in the annual rate of excise on alcohol.