Inflation tipped to hit target for first time in six years

The likelihood of inflation sticking in the Reserve Bank's target band of 1-3 per cent should be a satisfying result for Governor Graeme Wheeler as he finishes his five-year term in September. Photo / Mark Mitchell

The consumer price index due Thursday looks set to put inflation back in the middle of the Reserve Bank's target band for the first time since 2011.

Market expectations for the CPI to show a consensus expecting it to hit two per cent year on year and 0.8 per cent for the quarter.

While it's unlikely to trumpet it, two percent inflation will represent something of a triumph for the Reserve Bank which has come under pressure to cut rates harder in the face of what some economists perceived as a risk of deflation.

At two per cent - or 2.1 as picked by ASB, Kiwibank and BNZ - the headline number would be well ahead of Reserve Bank forecasts in the February Monetary Policy Statement.

But as ASB economists note in their preview there were a number of one-off factors that pushed inflation higher than anticipated in the first quarter.

These included petrol prices, which lifted an estimated 6 per cent over the quarter and food prices have soared more than usual after wet weather events pushed vegetable up. A further 10 per cent tobacco tax excise increase rounded out the bumps, ASB noted.

There is some expectation that the inflation rate will ease again through the rest of the year.

"We expect annual inflation will ease to between 1.5 - 2 per cent over the remainder of 2017, as temporary drivers wane and we have an economy growing at or slightly above trend," Kiwibank chief economist Zoe Wallis noted.

And ASB notes that, while some sectors like construction are nearing capacity, other areas of the economy are not there yet and wage inflation is still modest.

"So the RBNZ will be watchful for a while yet in case inflation doesn't hold up. For that reason we expect the RBNZ will be comfortably on hold until late 2018. That will give the next permanent Governor plenty of time to get his or her feet firmly under the desk."

While that appears to be the most widely accepted view, BNZ's Craig Ebert notes that there is a chance of strong economic growth keeping the rate closer to two per cent.

We could start to see a flow through to higher wage expectation, he argues

"Don't underestimate the impact that CPI indexation still has on wage and salary negotiations in New Zealand these days ... with headline CPI inflation coming back onto the radar, wage adjustments based on cost-of-living clauses promise to as well."

Ebert also notes the Government's move to boost pay rates in the social service areas that it funds (principally aged residential care, home support and disability services) and argues this will have an effect on wider wage inflation as it flows through in the third quarter.

Regardless, given the deflationary pressures in the global economy during the past few years, the likelihood of inflation sticking in the Reserve Bank's target band of 1-3 per cent should be a satisfying result for Governor Graeme Wheeler as he finishes his five-year term in September.