KEY POINTS:
Inflation is back outside the Reserve Bank's target band, leaving little chance the economy will be released from the grip of higher interest and exchange rates any time soon.
The consumers price index rose 1.2 per cent in the December quarter, higher than the Reserve Bank or the weight of opinion among market economists had predicted.
And because an unusually weak figure for December 2006 (when the CPI fell 0.2 per cent) dropped out, the annual inflation rate jumped from 1.8 per cent in September to 3.2 per cent.
It has been above 3 per cent for six of the past 12 quarters.
There was some good news for the Reserve Bank in yesterday's numbers, however, which kept the market's reaction to the upside surprise muted.
Non-tradables inflation, which refers to those items - roughly half of the CPI - which are not affected by international prices or the exchange rate, rose by just 0.7 per cent in the December quarter, pulling annual non-tradables inflation down to 3.5 per cent, its lowest rate for nearly five years.
"Normally the non-tradables rate is more influential than the headline rate in the Reserve Bank's thinking," said Westpac chief economist Brendan O'Donovan.
"But other measures of core inflation are still pointing to high and persistent inflation."
The 10 per cent trimmed mean measure, for example, which disregards the largest price rises and falls in order to reflect what is happening to the broad mass of prices in between, rose 1.1 per cent in the quarter and 3.5 per cent over the past year.
"These pressure will not abate any time soon," O'Donovan said.
"There is likely to be further food price inflation through 2008 influenced by strong increases in international prices to date. Add to this the medium-term inflationary pressures from the emissions trading scheme and regional petrol taxes, and projected ACC levy increases, and the medium-term inflation outlook is worrisome."
The biggest contributor to the CPI increase was petrol, up 5.4 per cent for the quarter and 16.9 per cent for the year.
But even if it had not increased at all in the December quarter the inflation rate would still have hit 3 per cent.
In all, 57 per cent of the 685 items in the consumers price index rose, representing 73 per cent of a typical household's spending.
The increases were heaviest among staples like transport fuels, food, electricity, gas and local body rates, while offsetting falls were among more discretionary items like consumer electronics and domestic air fares.
Inflation has now averaged just over 3 per cent over the past three years and is widely forecast to remain there or thereabouts for another year at least.
BNZ economist Stephen Toplis said household spending would remain under pressure for at least the next 12 months, keeping overall economic growth below 1.5 per cent this year.
