Annual inflation ticks up to 1.8 per cent

File photo / David White

Inflation was well-behaved in the June quarter, coming in at the low-end of expectations at 0.3 per cent for the quarter and 1.8 per cent for the year.

Indeed, without the impact of a rise in the tax on tobacco the quarterly rise in the consumers price index would have been just 0.1 per cent, Statistics New Zealand said.

But equally, without the impact of a 0.9 per cent drop in food prices it would have been 0.5 per cent.

Market expectations had clustered around 0.5 per cent, which was also the Reserve Bank's forecast.

Core measures of inflation were also subdued, which economists said should give the bank some comfort given that inflation, and inflation expectations, will soon take the strain of the increase in GST and the impact of the emissions trading scheme.

Between them they are expected to add 2.3 percentage points to the inflation rate over the second half of the year.

Non-tradeables inflation, where international prices and the exchange rate are not an issue, was 0.6 per cent for the quarter and 2.2 per cent for the year.

But without the increase in the tobacco excise non-tradeables inflation would have been 0.2 and 1.8 per cent respectively, which is less than the Reserve Bank had expected.

The 10 per cent trimmed mean measure, which excludes the largest price rises and falls and reflects what happens to the broad mass of prices in between, rose 0.3 per cent in the quarter and 1.9 per cent in the year, down from 2.3 per cent in March.

If petrol is excluded the CPI increase was 0.2 per cent for the quarter and 1.4 per cent for the year, and excluding central and local government charges 0.3 and 1.5 per cent respectively.

"Aggressive retail price discounting was evident in the numbers, with the household contents and services group falling 0.4 per cent when it usually records a seasonal increase in prices," ANZ economist Mark Smith said.

Rents rose 0.5 per cent in the quarter and construction costs 0.4 per cent.

"Given rising prices for building materials, this suggests construction firms are absorbing some of those increases into their margins."

While the June CPI overall suggested firms lacked pricing power, the Reserve Bank would be wary of attempts to claw back margins by increasing prices by more than the October 1 GST rise justified, Smith said.

BNZ economist Doug Steel said the latest inflation outcomes were a clear sign the Reserve Bank got monetary policy about right in late 2008 and early 2009 when it was slashing the official cash rate by 100 and 150 points at a time. "This was no mean feat."

Even so inflation of 1.8 per cent could be seen as relatively high given the size of the recession.