Accelerating inflation isn't expected to sway the Reserve Bank from a March rate hike, as rising consumer prices firm up the outlook of a strengthening economy.

Markets were surprised at the strength of today's inflation data, with the New Zealand dollar climbing 0.8 per cent after Statistics New Zealand said the consumers price index increased 0.1 per cent in the three months ended December 31, slowing from a quarterly increase of 0.9 per cent.

That was against a forecast decline of 0.1 per cent in a Reuters survey of economists and the Reserve Bank's expectation of a 0.2 per cent fall. The annual pace of inflation was 1.6 per cent, its fastest pace since March 2012 and slightly ahead of forecasts.

"This cements where we were heading - that the bank signalled its move to raise rates when needed," said Robin Clements, economist at UBS New Zealand in Christchurch. "It makes it (the Reserve Bank) more comfortable in its approach to go through all the reasons of its outlook when it comes out in March, and next week sets the path towards that."


Central bank governor Graeme Wheeler had previously indicated he will start hiking the 2.5 per cent official cash rate this year to head off the threat of future inflation as the Auckland and Christchurch property markets continue to bubble and as the Canterbury rebuild gathers momentum.

Traders are pricing in a 26 per cent chance of a rate hike, according to the Overnight Index Swap curve.

Chrstina Leung, an economist at ASB, said the 0.5 per cent decline in tradable inflation, which includes goods and services facing international competition, was less than what the Reserve Bank was picking, while non-tradable inflation was in line with expectations with an increase of 0.5 per cent.

"We continue to expect the RBNZ will wait until March to raise the OCR, although we now see the probability of a January OCR increase as slightly higher now (25 per cent, up from our pre-CPI view of 20 per cent probability)," Leung said in a note. "Although NZ inflation is contained for now, the OCR will need to be increased before long as demand improves and brings a lift in underlying inflation pressures over the coming year."

In a statement released by ANZ, the bank said 2.5 per cent OCR had a limited shelf life.

"While the January OCR decision is finely balanced, we expect the RBNZ to raise the OCR at next week's OCR Review and follow up with two additional hikes in subsequent meetings," ANZ chief economist Cameron Bagrie said.

The quarterly increase was driven by a 12 per cent rise in the price of international airfares, the biggest quarterly gain in four years, and a 6.7 per cent increase in domestic flights.

Prices for housing and household utilities rose 0.5 per cent with a 1.1 per cent rise in the cost of new housing and a 1.6 per cent increase in property maintenance services. Prices for milk cheese and eggs advanced 4.2 per cent in the quarter.

Those were offset by a 20 per cent drop in the price of vegetables and a 3.5 per cent decline in the price of petrol.

The annual pace of inflation, which stayed in the Reserve Bank's target band of between 1 per cent and 3 per cent, was driven by a 3.2 per cent increase in housing and household utilities, with a 4.7 per cent increase in new housing prices, a 2.1 per cent rise in rental prices, 4.3 per cent increase in property maintenance, and a 3 per cent rise in electricity prices. Petrol prices for an annual 0.9 per cent

Prices for clothing and footwear fell an annual 1.4 per cent, led by cheaper women's clothing, clothing accessories and men's footwear, and 2.8 per cent decline in the annual price of communications was led by a 21 per cent slide in prices for telecommunication equipment.

The level of discounting in the quarter was unchanged at 15 per cent of prices discounted from the September period.