Petrol price spike adds to Reserve Bank headache

Yesterday's 6c a litre increase in petrol prices will further inflame inflation concerns and give the Reserve Bank a more severe headache, according to economists.

March quarter consumer price index data due today is likely to show inflation at 3.4 per cent - well above the 1 per cent to 3 per cent band which is the target for the Reserve Bank.

If the 3.4 per cent figure is correct it will be the third consecutive quarter that inflation has been outside the band.

BNZ economist Stephen Toplis said the inflation news would get worse before it improved.

"We see annual inflation rising to 3.6 per cent in the second quarter," he said.

Toplis said it was not just petrol prices that would rise as a result of the exchange rate falling more than 10 per cent in the past couple of months.

"The same forces that have driven fuel prices higher in recent months - increasing world commodity prices and the falling exchange rate - will be putting pressure on a broad range of other tradeable prices," he said.

Because the main fall in the currency happened towards the end of the March quarter, the bulk of the second-round effects would not occur until the June quarter.

The BNZ expects that quarter to show inflation of 1.0 per cent, lifting the annual rate to 3.6 per cent - well above Reserve Bank forecasts.

With inflation expectations likely to rise from 3 per cent-plus levels at present, the Reserve Bank would be very much on notice, Toplis said.

People expecting rate cuts soon to alleviate the economic slowdown were likely to be disappointed.

ANZ economists said higher petrol prices would provide additional impetus to inflation and leave the CPI outside the Reserve Bank's target at least until next year.

They said that although the Reserve Bank was supposed to "look through" the one-off effects of the petrol price hikes, there was already talk of second-round pricing effects.

"Ultimately, we doubt such a dynamic will filter through. But the Reserve Bank will be having palpitations about the prospect."

The ANZ economists believe the Reserve Bank will stick to its earlier signal of not easing interest rates this year.

- NZPA