Housing drives CPI surprise

By BRIAN FALLOW economics editor

Analysts think Reserve Bank Governor Alan Bollard will keep interest rates on hold when he reviews them next week, despite higher-than-expected December-quarter inflation.

The consumers price index rose 0.7 per cent in the quarter.

The market had expected 0.5 per cent and the Reserve Bank 0.4 per cent.

Housing costs remain the hot spot. Existing houses are not included in the CPI, but the cost of building new ones rose 3.3 per cent over the quarter and 8.5 per cent over the year.

Building costs account for half of overall inflation over the past year.

Statistics New Zealand said that of firms reporting increases in the quarter, 62 per cent said rising labour was a reason, 60 per cent cited higher costs of construction components, and 56 per cent increased subcontractors' charges.

The tail-end of the annual round of local body rate increases lifted rates 3 per cent after a 7.2 per cent rise in the September quarter.

Electricity charges rose 3.2 per cent for the quarter, making 9.3 per cent for the year.

International airfares rose 3.2 per cent, reflecting the end of discounting on transtasman routes and normal seasonal increases elsewhere.

But the stronger dollar was reflected in cheaper petrol (down 2.1 per cent), used cars (0.7 per cent) and household appliances (1.7 per cent).

Deutsche Bank chief economist Ulf Schoefisch said the CPI did not seem to have fully captured the dollar-driven discounting by retailers reported in the month before Christmas.

This might be because of the timing of the survey - concentrated in the middle of the middle month of the quarter - in which case the effects would be captured in the March-quarter number, provided the discounting stuck.

Even more than in previous quarters the CPI outcome masked a wide gap between inflation in the tradeables sector, where prices are influenced by world prices, and the exchange rate, and the non-tradeables sector where no such constraints apply.

Non-tradeables inflation was 4.6 per cent for the year, and tradeables prices fell 1.3 per cent.

The continuing pressure on construction costs reflect a building industry working flat out. At some point, the increased supply of housing will come into balance with declining demand.

Net immigration, a main cause of population growth, has been falling since the middle of last year.

The number of house sales slowed in November and December.

Bank of New Zealand economist Craig Ebert contrasted the subdued increases in rents - up 0.5 per cent for the quarter and 3.1 per cent for the year - with double-digit house price inflation.

That indicated that yields on investment properties were sinking and investors were banking on further capital gains, he said.

Schoefisch said there was little evidence in yesterday's CPI data that inflation was spilling from housing to other parts of the economy. If housing was excluded, annual inflation in the non-tradeables side of the economy was 2.8 per cent.

One measure of core inflation, the weighted median price increase, was 0.5 per cent for the quarter and 1.9 per cent for the year, in the middle of the Reserve Bank's target range.

As the dollar climbed since the New Year, financial markets scaled back expectations that the bank would start to raise rates at the next review, on January 29.

But the partial fall of the exchange rate in recent days, and yesterday's inflation data are seen to have increased the likelihood of an interest rate rise next week.

On balance, market economists expect Bollard to wait and see if the dollar resumes its climb.

The figures

* CPI inflation for 2003 1.6 per cent

* Market expected 1.3 per cent

* Reserve Bank target 1 to 3 per cent

Hotspots

* Building costs 8.5 per cent

* Electricity 9.3 per cent

* Insurance 10.8 per cent