Petrol prices burn hopes of a cut in rates

When inflation was reported to have hit four per cent in the year to June, it effectively pushed out any hopes of a cut in interest rates well into next year.

As higher petrol prices piled up on top of persistent domestic inflation, Statistics New Zealand's consumer price index rose 1.5 per cent in the June quarter, taking the annual rate to four per cent for the first time since December 2000.

That time it quickly fell back - to 2.4 per cent nine months later - but this time economists expect it to persist around these levels into next year and the Reserve Bank's projections do not have inflation back within its 1-3 per cent target band until the second half of next year.

The bank will review its official cash rate (OCR) next week.

Petrol was the biggest contributor, jumping 14.7 per cent in the June quarter, making 35 per cent for the year - the steepest rise for 21 years.

But even without petrol, inflation would have risen 0.9 per cent in the quarter and 2.9 per cent for the year.

International airfares, up 7.1 per cent in the quarter, were another major contributor, along with electricity, up 3 per cent in the quarter and 6.1 per cent over the year.

Fruit and vegetable prices jumped 6.6 per cent in the June quarter, but Westpac economists said those increases would be felt in the September quarter. Construction costs were 1.4 per cent higher in the quarter and 5 per cent for the year.

Inflation in tradeable goods - those influenced by world prices and the exchange rate - was 2.3 per cent in the quarter, pushing the annual rate to 3.8 per cent from 2.1 per cent in the year to March.

There was no let-up in non-tradeables or domestic inflation, which remained at 1 per cent for the quarter and 4.1 per cent for the year.

Excluding petrol and airfares, tradeables inflation was just 0.3 per cent for the quarter and 0.1 per cent for the year, said First NZ Capital economist Jason Wong.

That indicates there has been only a modest impact so far from the lower exchange rate on prices consumers pay for imported wares. Prices for household appliances and new cars, for example, fell slightly.

Westpac chief economist Brendan O'Donovan said the weak "pass-through" from the exchange rate to consumer prices had held inflation down in the June quarter but it would prop it up in coming quarters.

Westpac expects inflation to persist around 3.8-3.9 per cent for a few quarters yet, instead of being capped at 3.5 per cent as it previously forecast.

Deutsche Bank chief economist Darren Gibbs is picking 3.8 per cent outcomes in the September and December quarter, then 4 per cent in the year to March next year.

The prospect of such numbers, say economists, will keep the Reserve Bank nervous about inflation drifting higher and reluctant to start cutting the OCR until it is sure inflation is heading down again. And it will be a year before the past quarter's 1.5 per cent drops out of the annual figure.

Gibbs does not expect a cut until April next year. O'Donovan and his ANZ National Bank counterpart Cameron Bagrie are picking March, but warn it is more likely to be later.

Money market pricing implies no cut until the 2007 September quarter.