The annual rate of inflation might officially double this week, but that's not seen as a problem

The annual rate of inflation might have officially doubled in the September quarter, some economists believe.

But given that the rate as measured by the Consumers Price Index was only 0.7% as of June, this is not seen as a problem - rather it will be seen as a vindication of the Reserve Bank's view that mounting inflationary pressures will force it to start raising official interest rates next year.

In the June quarter the CPI increase was just 0.2%, giving that 0.7% annual rate.

The RBNZ's expecting that the CPI for the September quarter, to be announced by Statistics New Zealand on Wednesday, will be a quarterly 0.8% rise and a 1.2% annual rise.

The central bank targets keeping annual inflation in a 1% to 3% range. The broad expectation is that the CPI figure this Wednesday will be at least an annualised 1% - and this will make it the first time in over a year that the inflation rate has not been outside and below the RBNZ's targeted range.

The high value of the Kiwi dollar has been a key driver of very low inflation rates.

ASB chief economist Nick Tuffley and senior economist Jane Turner are picking that CPI inflation lifted by 1% over the September quarter, taking annual inflation to 1.4%.

"September is a seasonally-strong quarter, influenced by the lift in fruit and vegetable prices and the annual council rate increases," they said.

Petrol significant

Petrol prices will be very significant, having risen by 5% over the quarter.

"The other key driver of the Q3 lift is an increase in housing and utilities costs," Tuffley and Turner said.

They said annual council rate increases were incorporated into the CPI over the September and December quarters. This year’s rate increases were slightly less than seen in recent years - they we estimate 3.5% on average.

"We also expect to see continued strong growth in construction costs. As Canterbury and Auckland construction activity increases, additional demand pressures will underpin a rise in construction costs. In Q2 we saw the first indication of construction cost inflation spreading from Canterbury to Auckland."

They said that a result on the high side of the RBNZ’s forecast would reinforce the likelihood of a March 2014 increase in official interest rates, "though the RBNZ does have some leeway to tolerate a higher result given the NZ dollar is currently tracking ahead of its expectations".

Westpac senior economist Michael Gordon said a return of inflation to within the RBNZ's 1% to 3% target band would give the RBNZ more confidence that monetary policy is on the right track.

Inflation pressure overstated

"However, the expected near-doubling of the inflation rate in one go probably overstates the degree to which inflation pressures are picking up," he said.

"With the economy still operating with some slack, and the New Zealand dollar remaining high (though no longer trending upward), we don’t expect that annual inflation to be back at the RBNZ’s target midpoint of 2% until the end of next year."

Westpac economists are picking a 0.9% CPI rise in the September quarter, giving a 1.3% annual rate.

"With house prices accelerating and construction activity picking up, we’ll be watching for further evidence of rising housing-related costs – new house prices, rents, maintenance and selling fees," Gordon said.

"The June quarter CPI showed a sharp jump in new house prices nationwide, but we’re waiting to see evidence of this happening consistently outside of the Canterbury region."

Downside legacy

But Gordon said that on the "downside" the legacy of the strong New Zealand dollar was likely to have had a depressing effect on prices in a range of categories such as clothing, furnishing and electronics.

"While the NZD was slightly lower over the September quarter, its impact on the prices of imported goods tends to come with a lag of as much as a year – and the trade-weighted index was still up 3.6% on a year ago. Used car prices could be especially soft, with the NZD up by 24% against the yen in the last year."

Tuffley and Turner said that in its September Monetary Policy Statement the RBNZ noted that confirmation inflation pressures have turned a corner would be a key consideration in terms of when it may start to lift interest rates.

"We expect the RBNZ will get this confirmation in the next two CPI releases (the Q4 CPI is released mid-January), and will start to lift the OCR from March 2014. At present the NZ dollar is tracking ahead of the RBNZ’s expectation, which give the RBNZ some leeway to tolerate a higher than forecast Q3 CPI outcome. Markets are already full pricing in the RBNZ’s own interest rate outlook." 

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