KEY POINTS:
The Reserve Bank may be sharpening its pencil for more interest rate hikes.
The Governor's big bogey - inflation - has come in at higher than the central bank's benchmark of acceptable levels.
The annual inflation rate, as measured by the Consumer Price Index (CPI), leapt from 1.8 per cent in the September quarter to 3.2 per cent in the December quarter, Statistics New Zealand said today.
Inflation for the December quarter was a higher than expected 1.2 per cent.
It means interest rates are likely to stay up for longer.
Private sector economists had forecast the quarterly rise at 1.0 per cent and an annual rate of 3.0 per cent while the Reserve Bank forecast a 1.1 per cent rise and an annual rate of 3.1 per cent.
Non tradeables inflation, watched closely by the Reserve Bank (RB), rose 0.7 per cent in the quarter and 3.5 per cent for the year.
Petrol prices played a big role in the index rise. The transport group (up 3.2 per cent) was the most significant contributor to the index rise.
International air transport rose 11.9 per cent but prices for domestic air transport made a downward contribution, falling 4.6 per cent in the quarter due to the entry of Pacific Blue into the domestic market.
If petrol prices had remained constant over the same period, the CPI still would have risen 1.0 per cent.
An increase food prices (up 1.5 per cent) made a significant contribution in the December 2007 quarter, with higher prices in the grocery food subgroup (up 3.4 per cent) being the most significant contributor. The increase in the grocery food subgroup was mainly driven by higher prices for cheese, butter and fresh milk.
The Food Price Index rose another 0.9 per cent in December and rose 5.4 per cent over 2007.
Prices for the housing and household utilities group rose 0.9 per cent. This was pushed up mainly by higher prices for the purchase of new housing (up 1.3 per cent), electricity (up 1.2 per cent) and actual rentals for housing (up 0.5 per cent).
RB governor Alan Bollard last month forecast inflation would remain above the bank's 1 to 3 per cent target band for all of this year and would average 3.4 per cent in the second half.
Westpac chief economist Brendan O'Donovan believed the bank will have to hike interest rates twice more this year to contain the second round inflationary effects arising from higher fuel prices.
However others believed the international credit crisis and the likelihood of recession in the United States would offset local inflation pressures and dampen demand.
Local investors have been fleeing riskier investments such as shares and finance companies and swamping banks with cash, putting pressure on banks to cut interest rates.
One of the big factors fuelling inflation, the wealth effect of higher housing prices, has come well off the boil.
Yesterday, Real Estate Institute (REINZ) figures showed the median house price fell 2 per cent in December to $345,000 and sales fell by a third.
The rise in the median price in 2007 was just 4.5 per cent compared with 11.9 per cent in 2006.
There was also a severe slump in house sales -- down 32 per cent on December 2006, to 5597.
The median number of days to sell a house remained steady at 36.
ANZ economist Philip Borkin said last month's price fall may not be a one-off event and further upside was strictly limited.
"We expect house price growth to remain limited and an outright fall is looking likely."
The New Zealand dollar, which has lost US2c in the last two days was little changed after the data.
- NZPA
