Inflation held in Q2 as spike looms

Tuesday 13th July 2010

New Zealand inflation probably didn't flare enough in the second quarter to unsettle the Reserve Bank though the arrival of government policy-induced charges this month is set to stoke prices in coming months.

The consumer price index rose 0.5% in the three months ended June 30, from a 0.4% pace in the first quarter, according to the median of 16 economists surveyed by Reuters. The CPI probably rose 1.9% from a year earlier, little changed from its first-quarter pace and in the middle of the central bank's 1%-3% target range.

Inflation expectations match Governor Alan Bollard's estimate in the June Monetary Policy Statement and would give him little cause for additional concern except for the looming impact of the Emissions Trading Scheme, higher ACC levies, the hike in GST to 15% and the increase in April of the excise on cigarettes.

While Bollard is expecting a modest flow on into underlying inflation from the expected initial spike to over 5% in the first three months of 2011, inflation and pricing expectations have been climbing. He will lift the official cash rate by a quarter point to 3% at the next review on July 29, according to 19 of 20 economists in a separate survey.

"The RBNZ is assuming that these changes will not flow through to price and wage setting behavior," said Christina Leung, economist at ASB, in a note. "Given medium-term inflation expectations are already close to the top of the RBNZ's inflation target band we believe there are substantial risks to this assumption. These risks aside, inflation is set to be stubbornly high."

Forecasts in the inflation survey ranged from 0.3% to 0.8% in the second quarter for an annual pace of 1.8% to 2.3%, meaning there is room for at least some in the market to be wrong footed by the data.

The New Zealand dollar has climbed 3.5% against the greenback so far this month, pushing above 71 US cents yesterday.

"The upside risks associated with this inflation spike are a prime reason for the RBNZ to maintain a tightening bias for now," said Robin Clements, economist at UBS New Zealand. He predicts the tobacco excise and higher transport related costs will stoke the CPI while a decline in food prices, recording their first annual decline since 2004, will cap inflation's acceleration for now.

Businesswire.co.nz

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