Petrol prices increase annual inflation rate to 3.4pc

Rising fuel prices helped to drive up inflation up by 0.7 per cent in the first three months of 2006 taking the annual inflation rate to 3.4 per cent.

Consumer Price Index data released today said the annual inflation rate was fueled by a 23.5 per cent increase in the price for petrol and a 5.9 per cent rise in the cost of the purchase and construction of new houses in the previous 12 months.

Statistics New Zealand said if petrol prices had not risen since March last year, the annual increase in the CPI would have been 2.6 per cent.

The inflation rate is outside the Reserve Bank's comfort zone of 3 per cent making it unlikely it will offer any interest rate relief in the near future, despite the slowing economy.

Statistics NZ said the 0.7 per cent increase in consumer costs in the first three months of 2006 followed a 0.7 per cent rise in the December quarter and 1.1 per cent in the September 2005 quarter.

Petrol increased in price by 5.1 per cent in the first three months of 2006, but there were also cost increases in food (1 per cent), housing prices (0.8 per cent) and the recreation and education sector (1.7 per cent).

Statistics NZ officials said it was difficult to pinpoint how much petrol price hikes were flowing through into other price increases.

They said there was anecdotal evidence of some flow through cost increases, but it was difficult to pinpoint how much of a contribution transportation cost hikes were influencing other prices in areas such as food.

The main contribution to the increase in the cost of food during the three months was a 1.9 per cent lift in the price of grocery food, soft drinks and confectionery, a 2.6 per cent rise in the price of meat, fish and poultry, and a 2.6 per cent hike in restaurant and ready-to-eat food.

Almost across the board increases in the price of food were heavily influenced by fresh fruit and vegetable price hikes of 9.7 per cent in the month of March.

The 1.1 per cent increase in the price of food during March alone was the category's largest monthly price rise since the 1.5 per cent recorded in January 2002.

The only areas to record a decrease in prices in the March quarter were transportation and apparel.

Overall transportation sector costs recorded a fall, despite petrol price rises, due to a 12.3 per cent decrease in international air travel prices.

Clothing prices went down 0.4 per cent in the quarter with footwear prices falling 1.4 per cent.

"Inflation is going the wrong way, from 3.2 to 3.4 per cent," said Citigroup economist Annette Beacher.

"It fits with other data which are all pointing the same way --- to resilience in the economy. With this result, we are changing our view on rates and now see no cut at all this year. The next move won't be until 2007," she said.

Today's data helped the recovery of the New Zealand dollar. Having risen 1.9 per cent last week, the kiwi rose above US$63c this morning before the CPI release and was up at US63.12c shortly after the announcement.

"With headline CPI stuck at 3.4 per cent year-on-year, and capacity utilisation data suggesting that inflation will not begin to fall until Q3, there is little scope for a cut in monetary policy in the near term, despite the fact that NZ is 50/50 on the question of a recession at present," said analyst Matthew Johnson of 4Cast.

"We expect cutting to begin in September, but are alive to the risks that this is put off."

- NZPA