Transport drives up inflation rate

By BRIAN FALLOW economics editor

Consumer prices rose 1 per cent in the June quarter, pushing the annual inflation rate up to 2.8 per cent from 2.6 per cent in March.

Inflation has averaged 2.9 per cent over the past two years.

That represented a continued risk to inflation expectations, said Westpac economist Nick Tuffley, and gave little support to Finance Minister Michael Cullen's criticism that the Reserve Bank has been unduly inflexible.

Half the June quarter increase came from the transport sector, reflecting a 9.9 per cent rise in petrol prices, much of it since retraced, and a 9.9 per cent rise in international air fares which reversed the normal seasonal fall in the March quarter.

The next biggest contributor to the consumers price index (CPI) rise was the household operation group, with electricity the main influence.

Electricity costs have risen 4.7 per cent over the past six months, after two years of relative stability.

Construction costs rose for the 13th quarter in a row, and private sector rent rises were more widespread than in the four previous quarters, Statistics New Zealand said.

But Deutsche Bank chief economist Ulf Schoefisch said the Reserve Bank would probably take some comfort from the relatively subdued increases in rents and construction costs, especially as housing market activity may have peaked.

"The risk of a repeat of the very high inflation in this sector during the mid-1990s seems to be receding."

Food prices fell 0.5 per cent - but are still 4.1 per cent higher than a year ago - with fruit and vegetables and beef the main contributors.

Overall, 422 of the 725 items in the CPI basket rose in price, representing 70.5 per cent of the index by expenditure weight, while 215 (19.8 per cent weighted) fell.

That is an increase from the 402 items which rose in the March quarter, and the weighted average increase was larger too, 2.1 per cent against 1.7 per cent.

Tuffley expects inflation to gradually taper off to around 2.5 per cent by the end of the year.

Schoefisch also thinks it will be next year before the stronger exchange rate and weakening commodity prices drive inflation substantially lower.

As the Reserve Bank had acknowledged on July 3, the outlook for inflation looked a little more benign than it projected in May, he said. But, with the measures of skill shortages and capacity use remaining relatively high, the bank's bias would be to tighten monetary conditions a little.

In light of the sorry state of international sharemarkets and the exchange rate coming back about 3 per cent from its peak a month ago on a trade-weighted basis, some economists doubt acting Reserve Bank governor Rod Carr will raise interest rates another 25 basis point on August 14.