Brian Fallow: Inflation broader and stronger than expected

NZ Herald economics editor Brian Fallow

Inflation was surprisingly strong in the September quarter for an economy that had been through five quarters of recession.

The 1.3 per cent increase in the consumers price index for the quarter was way above the market's expectations of 0.8 per cent and Reserve Bank's 0.9 per cent.

Much of increase, nearly 30 per cent, can be laid at the door of government charges, notably local body rates, the excise on alcohol and ACC motor vehicle relicensing fees. For the September year as whole government charges rose 5.4 per cent, more than three times faster than overall inflation.

Other seasonal factors - a 14 per cent rise in fruit and vegetables prices and 11 per cent in international air fares - account for another 28 per cent of the quarter's jump.

But even when these big increases are set to one side the picture that is left is of broader and stronger inflation that you would expect in an economy enfeebled by a prolonged recession.

Trimmed mean measures, which exclude the biggest rises and fall and reflect the broad mass of prices in between, recorded a 0.9 per cent increase for the quarter.

Fewer of the nearly 700 items in the CPI basket rose than in the June quarter but the average increase was larger, while the same number fell but not nearly as much.

Admittedly the annual rate at 1.7 per cent was the lowest sine March 2004. But much of that reflected falling fuel prices which had started to reverse in the most recent quarter.

If petrol and diesel prices had remained unchanged over the year inflation would have been 2.9 per cent, uncomfortably close to the top of the Reserve Bank's target band.