KEY POINTS:
The Reserve Bank may not be able to ignore for much longer the effects of rising energy prices, which economists and the central bank expect to help push inflation above the target band for at least the next year.
For the last four quarters, consumers price inflation has remained within the Reserve Bank's 1 to 3 per cent target.
However, inflation is expected to rise 1 per cent in the three months ended December, lifting annual inflation to 3 per cent from 1.8 per cent in September, according to economists polled by Reuters.
The data is released next Thursday, giving the central bank a week to consider its next move on interest rates.
While the Reserve Bank forecast annual inflation of 3.1 per cent, and at least 3 per cent for 2008, there may be some nasty surprises within the figures, economists said.
The Government's climate change policy was sure to result in higher power and petrol costs, as government estimates of the price of carbon had been cautious, Westpac chief economist Brendan O'Donovan said.
While the Government had assumed a carbon price of $15/tonne for its emissions trading scheme, some government officials forecast $45/tonne, and international estimates ranged as high as $200/tonne, Westpac has said previously.
"The RBNZ inflation forecast also includes what we think is a conservative estimate of the inflationary effects of the upcoming regional petrol tax," O'Donovan said.
Higher energy prices push up prices in other parts of the economy, such as transport and food.
The price of petrol was expected to have risen 7 per cent during the December quarter, ASB Bank said, a significant contributor to inflation during the period along with transport costs, as a result, and housing costs.
A 15 per cent fall in petrol prices in late 2006 had helped constrain annual inflation.
"With the inflation outlook so high and risks of behavioural shifts arising, it is a higher than expected Q4 inflation outcome that will provoke the most reaction from both the market and the RBNZ," ASB chief economist Nick Tuffley said.
"As it is, OCR cuts are looking less likely in 2008, more a story for 2009."
- NZPA
