KEY POINTS:
It is a close call, but worse-than-expected inflation in the June quarter makes it slightly more likely than not Reserve Bank Governor Alan Bollard will wait until September before cutting the official cash rate, economists say.
The consumers price index rose 1.6 per cent, pushing the annual rate
to 4 per cent. The market median forecast, and the Reserve Bank's, had been 1.4 per cent.
Petrol and diesel prices - up 12.8 and 29 per cent respectively - accounted for half the increase and food prices, a further quarter.
"But it's not just a petrol and food story," First NZ Capital economist Jason Wong said.
One measure of "core inflation", the 10 per cent trimmed mean which ignores the largest price rises or falls and looks at the broad mass of prices in between, rose 1.2 per cent in the quarter, making 3.8 per cent for the year. That is up from 0.8 per cent and 3.5 per cent respectively in the March quarter.
Inflation became more widespread: more items rose than in the March quarter, and by a larger amount, while fewer fell and by a smaller amount.
Non-tradeables inflation, which reflects prices not affected by international competition or the exchange rate, eased slightly to 0.9 per cent from 1.1 per cent in March. That was marginally better than the 1 per cent the Reserve Bank had expected.
Non-tradeables inflation has the potential to fall very rapidly as it has in the past, said ANZ National Bank chief economist Cameron Bagrie. Tradeables inflation, on the other hand, jumped 2.3 per cent in the quarter, making 4.8 per cent for the year.
It stands to go higher if the exchange rate falls, as expected, when the Reserve Bank starts to ease, economists warned.
Jason Wong expects the bank to cut the official cash rate by 75 basis points to 7.5 per cent by the end of the year, even though he expects to see annual inflation top 5 per cent in the September quarter.
"With 87 per cent of mortgage debt on fixed rates the transmission of OCR cuts to mortgage rates is incredibly slow. Average mortgage rates are still going up each month.
"Relief for the real economy will be via a weaker New Zealand dollar," Wong said.
Bank of New Zealand economist Stephen Toplis said the June quarter numbers were "confirmation that inflation is squeezing the hell" out of the average Kiwi householder.
"Ironically it will be the dampening effect of the price rises on core spending that will ultimately slow demand sufficiently to drag overall inflation back into acceptable bounds," he said. "But this is a long process."
Toplis does not expect annual inflation to get within the Reserve Bank's 1 to 3 per cent target band until September next year.
For Bollard to cut the OCR next week he would have to be convinced the economy was weak enough to cap that cost-push inflation, ASB economist Jane Turner said. ASB thinks he is marginally more likely to wait until September. So do Westpac and the Bank of New Zealand. ANZ National Bank says July. "But it's a call we lack conviction towards," Bagrie said.
PRESSURE POINTS
* Annual inflation hit 4 per cent in June, up from 3.4 per cent in March.
* Measures of core inflation, which exclude the big movers like petrol, still showed inflation well outside the Reserve Bank's target band and gathering pace.
* Economists see inflation getting worse before it gets better.
* But they expect the bank to cut interest rates anyway, perhaps as soon as next week.