One-offs spur June inflation rise

By Brian Fallow

WELLINGTON - Higher-than-expected June quarter inflation figures are unlikely to have the Reserve Bank rushing to raise interest rates.

Nor will petrol price rises or the double-digit rate increases likely to be struck by many local authorities change the bank's mind in the near future, economists say.

Consumer prices excluding interest (CPIX) rose 0.5 per cent in the June quarter, making 1.2 per cent for the year. Reflecting lower mortgage rates, the overall CPI rose 0.2 per cent to give an annual change of minus 0.4 per cent, the lowest rate since 1933.

Deutsche Bank chief economist Ulf Schoefisch said two of the major contributors to the latest increase - a 3.8 per cent rise in power prices and a 19.2 per cent rise in drivers licence, registration and warrant of fitness fees - were one-offs driven by Government policy changes and the Reserve Bank could ignore them.

Other extreme price movements, notably the 5.8 per cent fall in used car prices and the 11.76 per cent rise in domestic air fares, were unlikely to be repeated and might be partially reversed over the next quarter.

"Stripping these factors out of the bottom-line CPIX figures suggests the trend inflation rate is about 0.4 per cent for the quarter, which appears consistent with Reserve Bank thinking," Mr Schoefisch said.

The housing component of the CPI rose 0.4 per cent, after three quarters of falls.

"The return to positive inflation in the housing group does show that the economic recovery is starting to flow through into some increases in domestic prices," said ANZ chief economist Bernard Hodgetts.

Inflation in the non-tradeables sectors of the economy, which had declined sharply over the previous year or more, was on the rise again, climbing 0.9 per cent in the quarter. In the tradeables sector, influenced by international prices, inflation was zero.

Petrol prices, which made up 3.8 per cent of the CPI, fell 0.1 per cent in the June quarter but would rise in the September quarter as the effects of a sharp rebound in crude oil prices were felt at the pump.

The financial markets shrugged off the inflation data. The New Zealand dollar continued to trade in the low 52USc range.

The currency's recent weakness meant that monetary conditions were looser, by more than 100 MCI points, than the Reserve Bank had projected for the second half of 1999.

Mr Hodgetts said that the currency weakness, if sustained, would increase the prospects that the Reserve Bank would raise interest rates at the time of its mid-November monetary policy statement.

On the other hand, some recent economic indicators suggested the recovery might have lost some momentum.

Mr Hodgetts said that, plus uncertainty about the medium-term fiscal outlook with an election looming, might make the Reserve Bank prefer to defer a tightening until next March.