Prices rose more than expected by the Reserve Bank (RBNZ) and most bank economists in the three months to December, according to new Statistics New Zealand figures.
The consumer price index (CPI) rose 0.5% between the September and December quarters, and 1.9% between the December 2018 and December 2019 quarters.
At 1.9%, inflation was nearly bang-on the midpoint of the 1% to 3% range the RBNZ targets using the Official Cash Rate (OCR).
The figures might therefore encourage the RBNZ to sit tight, keep the OCR on hold at 1%, and see how the economy tracks, before changing it.
Most bank economists had expected the RBNZ to cut interest rates by 25 basis points this year (to stimulate economic growth and inflation), although some have in recent weeks started commenting that this might not be necessary.
Rents rise at fastest pace in 11 years
Price rises in the December quarter came largely on the back of rising rents, petrol prices and airfares.
Rents rose 0.8% in the December quarter, and 3.1% year-on-year - the highest annual increase since the September 2008 quarter.
The North Island, excluding Auckland and Wellington, experienced the largest annual increase in rent prices, up 4.9%. In Wellington rents were up 4.5%, Auckland 1.9%, and Canterbury 1.3%.
Stats NZ put the hikes down to higher demand as well as the Government's Healthy Homes Standards, introduced in July. It expected some landlords would have passed on the cost of upgrading their properties in line with the standards to tenants.
Meanwhile transport costs rose 2.1% in the quarter.
Airlines made their usual end-of-year price hikes, with domestic airfares rising 12% in the quarter. Petrol prices rose 1.6%.
Food prices fell, but by less than would usually be the case during this time of the year.
The New Zealand dollar only rose very slightly on the release of the figures.
Let's not get ahead of ourselves...
ANZ economists said: "It’s not a strong, “inflation’s getting out of hand” story by any means, and it’s backward looking, but it certainly affords the RBNZ time to watch how things evolve from here.
"Looking forward, we think economic activity is poised to gradually accelerate over the year ahead and grow around trend over the medium term, with resurgence in the housing market, improving business sentiment and the promise of a little extra government spending on key infrastructure all supporting.
"Unless something untoward happens, we think the RBNZ will keep the OCR at its current, stimulatory, level of 1% for the foreseeable future."
Kiwibank economists said: "We will likely see a +2% run rate for inflation this year, but it is likely to be temporary.
"Tradables inflation was the key driver of December quarter inflation... But tradables inflation tends to be transitory in nature.
"A stronger New Zealand dollar and softening petrol prices should cause some retracement...
"In order to maintain momentum into 2021, we suspect the RBNZ will cut the cash rate once more. Let’s face it, the Kiwi economy hasn’t generated much inflation over the last decade, and may struggle over the next decade."