Ugly spectre of inflation set to linger all year

Inflation, which rose in the March quarter, looks set to go higher and is unlikely to drop below 3 per cent this year.

Statistics New Zealand said yesterday the consumers price index rose 0.7 per cent in the quarter, in line with market expectations, but enough to push the annual rate from the previous quarter's 3.2 per cent to 3.4 per cent.

It was the third successive quarter that inflation has been outside the Reserve Bank's 1 to 3 per cent target band. It was also 3.4 per cent in the September quarter, but apart from that has only been higher than this once since the mid-1990s - when it hit 4 per cent in December 2000.

"The data is confirming what businesses and consumers already know, that there is a lot of inflation pressure out there," said Bank of New Zealand economist Craig Ebert."The Reserve Bank will have its work cut out."

Petrol prices rose 5.1 per cent in the quarter, making 23.5 per cent for the year - without which inflation would have been 2.6 per cent.

Economists expect a bigger impact from petrol this quarter, with several picking CPI inflation to hit 3.6 per cent for the June year.

"As of today, petrol prices at the pump are 14 per cent above the March quarter average," said UBS chief economist Robin Clements.

If those prices stick, they could add 0.4 percentage points to the CPI for the June quarter, twice the impact in the March quarter.

More than half of the 672 items in the CPI basket rose in price and only 19 per cent fell.

Inflation in the non-tradeables sectors, which are not disciplined by international competition or affected by the exchange rate, crept lower.

But at 4.2 per cent on an annual basis, non-tradeable inflation remains high from the Reserve Bank's point of view. It is off its peak of 4.4 per cent but as high as it was 12 months ago.

Tradeables inflation, meanwhile, is climbing as the dampening effect of a strong kiwi dollar dries up. It was 2.1 per cent in the year ended March compared with 0.8 per cent a year earlier.

Ebert said the pressure from the excess demand in the domestic economy would moderate, but more slowly than the Reserve Bank expected.

February's retail sales figures and a jump in housing market turnover last month were signs that the economy was nowhere near a recession.

"And alongside stubbornly high core inflation, we will start to see more noticeable inflation coming though via the lower exchange rate."

The BNZ predicts inflation staying above 3 per cent for the rest of this year and likely to remain above 3 per cent next year as well.

ANZ National Bank thinks inflation will top 3.5 per cent this quarter and stay above 3 per cent "well into" next year.

The bank's chief economist, Cameron Bagrie, still expects the Reserve Bank will start cutting rates in September, but said that depended on inflation expectations not rising.

Even Westpac, which is at the dovish end of the market, believes inflation will stay above 3 per cent for the rest of the year, making it at least 18 months outside the target band.

But Westpac economist Doug Steel said inflation had been outside the target band for four quarters in 2000/01 without eroding confidence in the low-inflation environment.

"Once inflation starts turning down again that should alleviate any fears of spiralling inflation and wages, which is something we haven't seen since the 1980s," he said.

"But if petrol prices continue to lift through this year instead of plateauing then that has certainly got to raise the risk of inflation expectations going up and with them the demand for wage rises."