Inflation hits two-year high

The construction cost of new buildings rose 1.7 per cent in the December quarter. File picture

Annual inflation rose to a two-year high of 2.7 per cent in 2004 after the December quarter Consumer Price Index (CPI) rose an unexpectedly high 0.9 per cent.

Economists on average had forecast the index to rise 0.7, which would have left the September quarter inflation rate unchanged on 2.5 per cent.

The Reserve Bank is now more likely to carry out its threat made in December to hike interest rates again, despite the probability of the economy slowing later this year.

The bank had expected a 0.7 per cent rise and may now be concerned inflation will next year rise above the 1-3 per cent target band it is mandated to maintain inflation within.

Statistics New Zealand said today a rise in international airfares was the most significant reason for the surprisingly high quarterly inflation number. Without airfares, the CPI would have been up just 0.6 per cent.

However, higher construction and electricity prices also made significant contributions, partly offset by lower prices for fresh vegetables and petrol.

Transportation prices increased by 1.8 per cent in the quarter mainly due to price rises for international travel, which were up 10.1 per cent. Petrol prices fell 0.6 per cent in the quarter.

Housing prices rose 1.1 per cent in the quarter, driven by increases in the construction of new buildings (up 1.7 per cent). SNZ said the rising cost of construction materials was widely reported by surveyed builders as a contributing factor.

Household operation costs rose 1.0 per cent in the quarter, with electricity prices up 4.1 per cent, partly offset by a 6.6 per cent fall in television and video prices. Food prices increased 0.6 per cent in the quarter, influenced by higher beef prices (up 7.3 per cent). This was partly offset by a 4.8 per cent fall in fresh fruit and vegetable prices.

SNZ today also released the December month Food Price Index which fell 0.1 per cent thanks to lower meat, fish, poultry, grocery, soft drink and confectionery prices. The Food Price Index rose 1.2 per cent in 2004.

For the year, the most significant contribution to the CPI's rise came from the purchase and construction of new dwellings (up 7.3 per cent) and petrol (up 13.5 per cent). Power prices were up 8.8 per cent for the year.

Significant downward contributions came from used cars (down 4.3 per cent) and household appliances and equipment (down 5.9 per cent).

In the quarter, inflation in the tradeable sector, which is exposed to the international economy, was 0.7 per cent while the non-tradeables component in the domestic economy was up 1.1 per cent.

The difference is narrower than some economists had expected given the strength of the New Zealand dollar.

Goldman Sachs JBWere economist Bernard Doyle said there was now a risk the Reserve Bank will make "what I would view as an unnecessary further interest-rate adjustment upwards", particularly after yesterday's Institute of Economic Research survey showing business expects the economy to remain strong.

"After this week, the risks of that have certainly increased. I thought the risk of a further rate rise was extremely low, around 15 to 20 per cent, but after this week you'd boost that probability to, say, 30 per cent."

"A fair amount (of analysts) still look for no change but certainly the left-field option of a rate rise has become a little less left-field after this week's news flow."

ANZ National Bank economist Sean Comber Treasury said the higher than expected inflation rate was almost entirely due to airfares, with fuel surcharges and the costs of security measures largely one-off factors.

He doubted the higher number would persuade the Reserve Bank to hike interest rates.

"They talk a tough line and that won't change. The overall story of monetary conditions needing to be tight won't really change."

The Reserve Bank would look through the one-off factors in the CPI, he said.

"They will continue to talk tough for the next six months but this number is unlikely to cause them to put rates up again. They will take a watch-and-wait stance."

The New Zealand dollar was unchanged after the data at US69.55c.

- NZPA