KEY POINTS:
Inflation was every bit as bad as expected in the September quarter but economists are confident fears about the fallout of the credit crisis will still lead the Reserve Bank to floor the accelerator when it reviews the official cash rate tomorrow.
The consumers price index jumped 1.5 per cent, with food and petrol doing most of the damage.
It pushed the annual inflation rate to 5.1 per cent, in line with market expectations but nonetheless the highest since June 1990, when the annual rate still showed the effects of raising GST from 10 to 12.5 per cent.
Food prices accounted for 42 per cent of the quarterly increase. Nearly half that related to the effect of dismal weather on the price of vegetables, especially in August.
Petrol's 4.6 per cent increase accounted for a further 16 per cent of the index's quarterly rise. Although petrol represents only 5.5c in every $1 of consumer spending it has been responsible for 28 per cent of the overall rise in consumer prices in the past year.
But international oil prices peaked in July and have nearly halved since then. The cost of imported crude, which is also affected by the exchange rate, accounts for 55 per cent of the price at the pump.
Food and petrol prices ought to be less problematic going forward as global commodity prices fall and weather-related effects wear off.
Other elements of yesterday's data suggest, however, that even in the third quarter of a recession, inflation was hardly under control.
A measure of core inflation - the 10 per cent trimmed mean, which disregards the largest price rises and falls and looks at the broad mass of prices in between, rose 1.3 per cent in the quarter and 4 per cent for the year.
In all, 71 per cent of the CPI, by expenditure weight, rose in price in the September quarter, up from 69 per cent in the June quarter, while 20 per cent of it fell, down from 23 per cent in June.
Non-tradeables inflation - the 54 per cent of the CPI where prices are not influenced by international prices or the exchange rate - remains elevated at 1.3 per cent in the quarter and 4.1 per cent for the year.
Tradeables inflation was even worse - 1.9 per cent for the quarter and 6.3 per cent for the year. Petrol accounts for half that, but while oil prices have tumbled, so has the dollar, which will keep the pressure on tradeables inflation.
"We've seen nothing but [economic] contraction this year and consumer and housing demand have been running below par for even longer. Imagine where inflation would be heading if this hadn't been the case," said BNZ economist Craig Ebert.
But while the Reserve Bank may be disappointed at this evidence of stubborn inflation, market economists still expected it to dispense a deep OCR cut, more likely 100 basis points than 75.
When it stared easing in July, it did so knowing inflation would get worse before it got better, Deutsche Bank chief economist Darren Gibbs said.
And the events of recent weeks seemed destined to cause recession across the major developed economies, he said. Deutsche Bank expects global growth next year to be the weakest for 30 years.
PRICE TAGS
September quarter
* Petrol: Up 4.6%
* Food: Up 3.7%
* Vegetables: Up 20%
* Domestic flights: Up 5.4%
* Second-hand cars: Down 8%
