Interest rate hike on cards this month

By BRIAN FALLOW

Rising inflation is all but certain to lead to another hike in interest rates by the end of the month.

The consumers price index rose 0.8 per cent in the June quarter, the steepest such increase for three and a half years, pushing the annual rate to 2.4 per cent from 1.5 per cent in March, Statistics New Zealand figures show.

If international air fares had not dropped (21 per cent during the past year), the inflation rate would already be 3 per cent.

Construction costs remain a hotspot, rising 1.9 per cent in the quarter and 8.8 per cent over the year. Of the construction companies reporting higher prices, 96 per cent cited higher components costs, 78 per cent higher subcontractors' charges and 65 per cent rising labour costs.

Although prices of existing homes are not included in the CPI, the buoyant housing market is reflected in real estate agents' fees, which rose 4.4 per cent, or 21.4 per cent, over the year.

Rents on the other hand were up only 0.4 per cent, the lowest quarterly increase since 2001, making 3.2 per cent for the year.

Electricity prices rose for the 10th quarter in a row. The latest 2.8 per cent jump pushed the annual increase to 10.4 per cent.

Petrol prices (which are surveyed weekly and averaged over the quarter) rose 7.8 per cent to be 19 per cent up on a year ago. Petrol accounted for nearly a third of the latest CPI increase.

It was not just a handful of big increases which pushed the CPI higher, however.

More troubling to the Reserve Bank would be the widespread nature of the increases with more than half of the 672 items in the basket rising. Price falls were fewer and smaller than in March.

Two measures of core inflation, trimmed mean and weighed median, were up at 2.7 and 2.6 per cent respectively, compared with 2.1 per cent in March.

The bank's June monetary policy statement forecast inflation to run around 2.75 per cent over the second half of this year and to be above 3 per cent through next year.

Governor Alan Bollard warned then that "further increases" might be needed in the official cash rate, which is next reviewed on July 29.

After a string of stronger-than-expected economic indicators, economists regarded an increase in the OCR from 5.75 to 6 per cent as in the bag, but are divided down the middle on whether another increase beyond that will happen.

The National Bank's economists are among those who believe one more turn of the screw will be enough. Bollard's allotted task is to keep inflation in the 1 per cent to 3 per cent band on average over the medium term, and they believe that gives him room to "look through" the oil price-induced spike in inflation and trust that a slowing economy will do some of the work for him.

The Institute of Economic Research says, on the other hand, companies' pricing intentions in Tuesday's quarterly survey of business opinion points to an inflation rate of 3 per cent by early next year.

Westpac regards the Reserve Bank's June forecasts for inflation as too pessimistic, especially in the light of subsequent falls in petrol prices and a stronger dollar.

On a trade-weighted basis, the dollar is 3.3 per cent higher than the average rate the bank's forecast assumed for the second half of this year.

Petrol aside, the exchange rate continued to restrain inflation from imports in the June quarter. Household appliances fell 1.9 per cent, and new cars increased 0.1 per cent.