Inflation back under the spotlight

A plunge in new car sales is helping to push second-hand car prices higher. Photo / Greg Bowker

Surprisingly strong inflation in the September quarter has cast further doubt on the Reserve Bank's stated expectation that it will not start raising interest rates until the latter part of next year.

The consumers price index rose 1.3 per cent in the quarter, way above the market's expectations of 0.8 per cent and the Reserve Bank's 0.9 per cent. It follows quarterly increases of 0.6 per cent in June and 0.3 per cent in March.

The annual rate at 1.7 per cent was the lowest since 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, Statistics New Zealand said, close to the top of the bank's target band.

The lift in inflation would be an unpleasant surprise for the Reserve Bank, ASB chief economist Nick Tuffley said. He now expects it to start raising the official cash rate in April, despite the high dollar.

So does Deutsche Bank chief economist Darren Gibbs.

While most of the surprise was in non-market sectors of the economy and a stronger than expected lagged impact of earlier weakness in the exchange rate, underlying inflation pressures were also a touch stronger than might have been expected in the current environment, he said.

Nearly 30 per cent of the quarter's increase 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 a whole, government charges rose 5.4 per cent, more than three times faster than overall inflation.

A 14 per cent rise in fruit and vegetable prices and an 11 per cent lift in international airfares, following two quarters when they fell sharply, 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 than might be expected in an economy enfeebled by a prolonged recession. Trimmed mean measures, which exclude the biggest rises and falls and reflect the broad mass of prices in between, recorded a 0.9 per cent increase for the quarter.

Non-tradeables inflation, which reflects prices in the domestic parts of the economy unaffected by international prices and the exchange rate, rose 1 per cent, the highest rate for a year, keeping the annual rate at 3 per cent.

Housing-related inflation looked well behaved, ANZ National Bank economist Philip Borkin said. "Construction costs rose a subdued 0.1 per cent, while rents rose only 0.2 per cent."

But at an annual rate of 3.7 per cent non-tradeables inflation excluding housing-related components was reasonably high, he said.

"With the economy building momentum and the housing market picking up, the risk is we could see upward price pressure emerge sooner than expected," Borkin said.

Tuffley expects the rebound in the dollar in the past few months to dampen imported inflation going forward. "It still appears some disinflation pressure will continue from housing and wage costs as well."

But he sees yesterday's surprise inflation outcome and the acceleration in house prices as making the Reserve Bank more reluctant to keep the OCR on hold until "the latter part of 2010".

Second-hand car prices race ahead in September

One of the surprises in yesterday's September inflation data was a 3.1 per cent jump in second-hand car prices.

Bank of New Zealand economist Stephen Toplis said several factors were pushing prices higher.

"The plunge in new car sales over the past year or two is reducing the supply of used cars."

A tougher consumer credit market gave dealers - at least those who had survived the "carnage" of the past 12 months and were able to offer finance - greater leverage over price.

And while the dollar had been rising solidly it was still down markedly from its peak against the year, Toplis said.

Buyers of used cars, along with other motorists, also faced a 16 per cent increase in relicensing fees, largely arising from ACC charges.