Power, airfares push inflation close to danger zone

Inflation rose 2.7 per cent last year, lifted by a bigger than expected increase in the December quarter.

It was pushed up by higher electricity prices and airfares.

The consumer price index rose 0.9 per cent in the fourth quarter, Statistics New Zealand said yesterday.

That is the biggest quarterly increase since a 1 per cent rise in June 2002. It is ahead of the 0.7 per cent increase analysts expected, and the 0.6 per cent in the third quarter.

The cost of international flights rose 10.1 per cent due to fuel surcharges imposed by airlines as they strove to recoup the cost of rising fuel prices. Stripping this out the CPI would have risen by just 0.6 per cent.

Quarterly electricity prices rose 4.1 per cent, with retailers lifting prices in anticipation of higher generation costs. Transport costs rose 1.8 per cent and buying and building a new house climbed 1.7 per cent.

ANZ senior economist Cameron Bagrie said there were signs inflation pressure was broadening.

"It looks like inflation is likely to remain persistent for most of 2005, around 2.5 to 3 per cent, given demand within the New Zealand economy and capacity pressure."

The Reserve Bank is tasked with keeping annual inflation between 1 per cent and 3 per cent.

The Reserve Bank next reviews the Official Cash Rate on January 27. It has raised the cash rate six times, from 5 per cent to 6.5 per cent, over the past year.

BNZ said there was finally evidence price pressure in the housing sector was falling. House prices rose 1.1 per cent in the quarter and 5.6 per cent over the year.

"While still uncomfortably high, the annual gain is now well shy of the 7.1 per cent peak of the second quarter of 2004," the bank said.

The annual inflation increase was driven by a 13.5 per cent rise in petrol prices, 8.8 per cent rise in the cost of electricity and 7.3 per cent rise in the cost of buying and building a new house.

In the December quarter food prices rose 0.6 per cent with beef prices up 7.3 per cent. Fresh vegetable prices fell 4.8 per cent.

Television and video prices fell 6.6 per cent.