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NZ inflation accelerates to fastest pace in 18 years

Tuesday 15th July 2008

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New Zealand inflation accelerated in the second quarter to the fastest pace in 18 years as the soaring cost of fuel drove up transport prices and food became more expensive.

The Consumers Price Index increased 1.6% in the June quarter for an annual rate of 4%, Statistics New Zealand said in a statement. That’s faster than the 1.4% quarterly and 3.8% annual pace predicted by economists and the central bank.

New Zealand faces stagflation, with rising prices as the economy slows, making it harder for the central bank to justify aggressive reductions in interest rates this year. Annual inflation may reach as much as 5.5% in the third quarter, according to Westpac Banking Corp., well above the central bank’s 1% to 3% target range.

“The RBNZ has an extremely difficult task as it tries to balance soaring costs and inflation against plummeting growth,” Brendan O’Donovan, chief economist at Westpac, said in a report before the figures were released.

He predicts a severe though short-lived downturn, with economic activity improving, starting in the December quarter.

Fuel Costs

The price of crude oil has surged 50% this year and traded at $144.60 a barrel on the New York Mercantile Exchange yesterday. Unleaded 91 octane petrol is selling for about NZ$2.19 a litre in Wellington today.

Transport prices rose 4.9% in the June quarter, with most of the increase coming from a 12.8% gain in the price of petrol, Statistics New Zealand said. Diesel rose 29%.

Prices for food rose 2.2%, mainly reflecting increases for grocery food, vegetables, restaurant meals and ready-to-eat food.

Housing and household utility prices rose 1.2% as the price of electricity rose 3.6%, the agency said.

Annual inflation accelerated from a 3.4% pace in the first quarter.

Reserve Bank Governor Alan Bollard will cut the 8.25% official cash rate in September, according to a Bloomberg News survey. Three expect a rate cut on July 24, the bank’s next scheduled review of monetary policy.

“The situation now requires a leap of faith on the RBNZ's part, on the link between growth and inflation,” said Shamubeel Eaqub, director of Australia & New Zealand investment research at Goldman Sachs JBWere (NZ) Ltd. “Without easing soon, we believe the current downturn is apt to become a deep and protracted recession.”

By Jonathan Underhill

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