Reserve Bank tipped to increase OCR next week after higher than expected price index.
Inflation in the December quarter at a rate higher than expected has ANZ economists predicting Reserve Bank governor Graeme Wheeler will start raising the official cash rate as soon as next week.
"Higher than expected" does not mean high, however. The consumers price index rose 0.1 per cent in the quarter, pushing the annual inflation rate to 1.6 per cent from 1.4 per cent in September and just 0.7 per cent in June.
But the quarterly rise compares with the 0.2 per cent fall the Reserve Bank forecast in its December monetary policy statement and it follows another data surprise - September quarter gross domestic product growth came in at 1.4 per cent instead of the 0.9 per cent the bank was expecting.
ANZ chief economist Cameron Bagrie argues that in the last two cycles the central bank was too slow to raise interest rates and ended up having to raise them higher than if it had been more pre-emptive, with greater collateral damage via the exchange rate as a result.
Wheeler's policy targets agreement with the Government and emphasises the 2 per cent mid-point of the inflation target band.
"Graeme Wheeler doesn't give the impression of a guy who likes to muck around," Bagrie said.
"If he decides something needs to be done, it's done."
Westpac economist Michael Gordon said two elements of the latest report would give the Reserve Bank cause for concern.
"The strong New Zealand dollar is providing less of a dampening effect, and housing-related price pressures are becoming more prevalent," Gordon said.
"Our core view has long been that the Canterbury rebuild would strain the economy's resources and generate inflationary pressures, forcing the Reserve Bank into a substantial OCR hiking cycle. That view now looks to be coming to fruition. We expect the first OCR increase to come in March, but we acknowledge that next week's OCR review is now 'live'."
Bank of New Zealand economist Doug Steel said money market pricing implied a 50:50 chance Wheeler would raise the OCR from 2.5 to 2.75 per cent on Thursday next week, up from around a 25 per cent chance of a hike before the CPI was released.
"Still, we do not quite expect a January hike but anticipate the Reserve Bank will use the meeting to set up a first 25 basis points hike in March when it publishes its full monetary policy statement," he said.
Tradeables inflation, which reflects prices influenced by international prices and the exchange rate, was minus 0.5 per cent in the December quarter when the Reserve Bank had expected minus 1 per cent.
Economists saw some evidence there of an increase in pricing power by retailers as household demand picks up.
"Over the past few years, the higher New Zealand dollar has placed downward pressure on the price of imported household items, and modest household demand has seen discounting even greater than what movements in the dollar would suggest," said ASB chief economist Nick Tuffley.
"We had expected the recent improvement in household demand would allow retailers to recoup some operating margin lost during the recession.
"However, the price increases across clothing, furniture and whiteware over the December quarter were stronger than we expected."
Construction costs are rising - 1.1 per cent in the quarter nationwide including a 1.5 per cent rise in Auckland which outstripped even Canterbury's 1.3 per cent.
Petrol prices were down 3.5 per cent from the all-time high recorded in the September quarter.
Consumers price index
* Up 0.1 per cent in the December 2013 quarter.
* Higher international air fares and rising housing and dairy prices partly countered by lower vegetable prices and cheaper petrol.