Good inflation news leaves analysts at odds over OCR rise

Without an increase in petrol, there would have been no net rise in the CPI. Photo / NZ Herald

Benign inflation numbers for the March quarter have left economists divided as to whether the Reserve Bank will see them as buying it more time or as the recovery panning out on schedule.

The Consumers Price Index (CPI) rose 0.4 per cent, bettering the median market forecast of 6 per cent and leaving the annual inflation rate unchanged at 2 per cent.

The biggest single upward contributor was petrol, which rose 6.7 per cent in the quarter.

Without that there would have been no net increase in the CPI. It was the steepest petrol price increase since September 2008 but prices at the pump are still 14 per cent lower than they were then.

Non-tradeable inflation, which reflects prices of goods and services that face no foreign competition, was a touch below Reserve Bank expectations at 0.5 per cent, or about half the rate prevailing during the pre-recession boom years.

It brought the annual rate on non-tradeable inflation down to 2.1 per cent, its lowest since 2001.

"But it's not exactly low, after a recession and as the starting point for recovery," UBS economist Robin Clements said.

Central and local government charges remain a hotbed of inflation, up 1 per cent in the quarter and 4.6 per cent for the year.

Government policy is expected to drive up the inflation rate over the year ahead with the impact of ACC levy increases, the emissions trading scheme and a rise in the GST rate all yet to appear in the numbers.

Clements said a headline inflation rate in the 4 to 5 per cent range by the end of the year was quite plausible.

"Now, the Reserve Bank will quite rightly look through the impact of these policy changes and be more concerned with the pace of economic recovery and its sustainability and durability," he said.

"However, a headline inflation rate of this magnitude adds considerable upside inflation risk in the policy horizon from potential second-round impacts on wage and price-setting behaviour as the recovery progresses."

ASB economist Christina Leung said weak household demand evident in retail sales data was reflected in lower prices for imported consumers goods, beyond what the high New Zealand dollar late last year would suggest.

Clothing and footwear were down 1.2 per cent, furniture and floor coverings down 2.1 per cent, appliances down 1.6 per cent and audio-visual equipment down 5.7 per cent.

"We think the odds are now - just - tilted in favour of a July start [to the Reserve Bank's tightening cycle] rather than June," Leung said.

The money market rallied in response to the report, downgrading the chances of a June start to 30 per cent in favour of July.

Westpac chief economist Brendan O'Donovan continues to expect a rise in the OCR in June.

But ANZ chief economist Cameron Bagrie said the March inflation numbers gave the bank scope for patience.

He continues to expect tightening to begin in the September quarter.