Inflation reaches 4-year high

Inflation has climbed above 3 per cent for the first time in four years, due to higher petrol prices and ongoing domestic demand - a worrying sign for the Reserve Bank.

Statistics New Zealand said yesterday consumer prices rose 1.1 per cent in the September quarter. That was broadly in line with market and Reserve Bank expectations of 1.2 per cent and enough to push the annual rate to 3.4 per cent, up from 2.8 per cent in the June quarter.

Of itself, it is not a breach of the Reserve Bank's target, which is to keep inflation between 1 and 3 per cent "on average over the medium term".

To achieve that, the bank will have to persuade people it is a brief spike rather than a sustained sojourn above the 3 per cent mark.

Governor Alan Bollard, concerned that the underlying demand pressures in the economy show too little sign of abating, tacitly endorsed in a speech on Friday the financial markets' expectations that he will raise the official cash rate again, by 25 points to 7 per cent, next week.

Underpinning inflation is the apparently indomitable housing market. Real Estate Institute data also out yesterday recorded annual inflation of 16 per cent, as well as higher turnover in September and a drop in the average number of days it takes to sell a house.

And the Reserve Bank, already nervous about higher reported inflation breeding more of the same through higher wage settlements, will have noted Engineers Union national secretary Andrew Little's warning yesterday that the union would be considering the CPI figures when drawing up wage claims.

ANZ National Bank chief economist John McDermott said: "There are more and more anecdotes of second-round price increases as we all try to recoup that lost wealth [due to inflation]. The Reserve Bank has to lean against that."

He expects inflation to remain over 3 per cent for at least a year, even if oil prices climb no higher.

Westpac chief economist Brendan O'Donovan said the Reserve Bank's worries about the risk of petrol prices feeding into higher inflation expectations made a rate hike on October 27 a near certainty.

"However, hiking rates is the wrong move so late in the cycle," he said.

"The bank has plenty of scope to wait, because domestic demand has already been slowing over the past six months as fixed-rate mortgages roll over on to higher rates and petrol prices squeeze discretionary spending."

Economists said the bank would find little comfort in yesterday's numbers.

Although petrol was the main culprit, the figures showed high and rising core inflation even without it.

Petrol increased 13.1 per cent in the quarter; without it the CPI would only have risen 0.7 per cent.

Construction costs, a longstanding hotspot, rose 1 per cent, but that was down from 2.2 per cent in the June quarter and 1.5 per cent in March.

International air fares were up 3 per cent in the quarter but down 5.1 per cent for the year.

The price rises were widespread: 321 items representing 68 per cent of the CPI rose, up from 62.5 per cent in the June quarter.

One measure of core inflation, the trimmed mean which disregards the 10 per cent of biggest rises and falls, recorded a rise of 0.9 per cent for the quarter and 3.2 per cent for the year.

Non-tradeables inflation, which reflects domestic demand and supply in the economy, rose 1.1 per cent for the fourth straight quarter.

Prices for tradeable goods, which are subject to international competition and exchange rate, are no longer diluting that effect. They also rose 1.1 per cent in the quarter.