Annual inflation hits four per cent

The annual inflation rate, as measured by the Consumer Price Index (CPI), rose from 3.3 per cent to an unexpectedly high 4.0 per cent in the June quarter, Statistics New Zealand (SNZ) said today.

Inflation for the quarter was 1.5 per cent. Both figures were above the predictions of economists who took part in a Reuters poll.

The median of their forecasts for the annual change was 3.7 per cent and for the quarterly change 1.2 per cent.

This is the fourth consecutive quarter the inflation rate has been above the 1-3 per cent band the Reserve Bank is mandated to maintain by the Government.

The biggest contribution to the CPI this quarter came from transportation which was up 5.5 per cent as a whole, with petrol prices up 14.7 per cent and international air travel up 7.1 per cent, SNZ said.

For the year to the June 2006 quarter, prices for petrol and international air travel rose 32.2 per cent and 8.7 per cent respectively.

The annual increase for petrol was the largest since the June 1985 quarter, when petrol prices were up 35.4 per cent.

Had the petrol price remained unchanged from the June 2005 quarter, the annual increase in CPI would have been 2.9 per cent, SNZ said.

In other areas, housing rose 1.2 per cent in the June 2006 quarter, with prices for buying and building new dwellings up 1.4 per cent. For the year to June, prices for buying and building new dwellings was up 5.0 per cent.

Household operation was up 1.4 per cent in the June quarter, with the most significant contributions a 3.0 per cent rise in the price of electricity and a 4.5 per cent rise in telephone rental and connection prices.

For the year to June household operation was up 2.1 per cent, with a 6.3 per cent rise in the electricity price a significant contributor.

That was partly offset by lower prices for television and video equipment, down 18.3 per cent, SNZ said.

SNZ's Food Price Index was up 1.0 per cent in June and 2.9 per cent for the year.

A 6.3 per cent rise in the subgroup fruit and vegetables in June drove the overall rise in food prices, with an 11.5 per cent rise in the prices of fresh vegetables for the month driven by a 25.7 per cent rise in the price of potatoes and 71.7 per cent rise in the price of broccoli.

Meat, fish and poultry was up 1.3 per cent in the month, including fresh chicken up 9.5 per cent.

For the year, fruit and vegetables were up 9.1 per cent, with meat, fish and poultry up 3.5 per cent, restaurant meals and ready-to-eat food up 2.6 per cent, and grocery foods, soft drinks and confectionery up 1.2 per cent.

The annual inflation rate was the highest since December 2000 when it was also 4.0 per cent. The quarterly increase was the highest since a 1.8 per cent rise in June 1990.

Goldman Sachs JBWere economist Shamubeel Eaqub said the latest CPI rate would reinforce the Reserve Bank's view that official interest rates should be held at the current 7.25 per cent level.

Both underlying inflation trends and inflation expectations remained uncomfortably high for now, but Goldman expected them to moderate in time for interest rate easing to start next March, Mr Eaqub said.

The domestic economy was expected to cool further as the impact of monetary policy tightening filtered through the economy, but with NZ dollar depreciation and ongoing elevated international crude oil prices, tradeable inflation was likely to remain high.

- NZPA