KEY POINTS:
Soaring food and petrol prices pushed annual inflation up to 4 per cent in the June year after the Consumer Price Index (CPI) leapt a higher than expected 1.6 per cent in the June quarter, Statistics New Zealand said today.
The department also reported food prices rose 8.2
per cent in the year to June - the highest rise in the Food Price Index (FPI) for 18 years.
The annual inflation rate had been 3.4 per cent in the March year and the rate has now been outside the Reserve Bank's 1-3 per cent target band for three successive quarters.
Economists on average had forecast a 1.4 per cent rise and an annual rate of 3.8 per cent.
The June quarter rate - the highest quarterly rise in 18 years - will dampen hopes the Reserve Bank will trim the Official Cash Rate at its review on interest rates on Thursday-week.
Bank Governor Alan Bollard has signalled he will cut rates, probably starting in September, as a result of a steeply slowing economy, but some economist have called for him to act sooner.
BNZ economist Stephen Toplis told NZPA that it would depend on how the Reserve Bank assessed core inflation, which was actually falling sharply with the economy.
"It will be a line-ball call," he said.
SNZ said food prices rose 1.3 per cent in the month of June with fruit and vegetables up 5.2 per cent, meat poultry and fish up 1.3 per cent and grocery food up 0.4 per cent.
On an annual basis, grocery food was up 12.1 per cent and within this category, milk was up 22 per cent, cheddar cheese 62 per cent, bread 15 per cent and butter 87 per cent.
Fruit and vegetables were up 9 per cent for the year while meat, poultry and fish 4.4 per cent.
The Food Price Index makes up just over 17 per cent of CPI.
A 4.9 per cent rise in transport prices, fuelled by a 13 per cent rise in petrol prices, was the main factor in the jump in the June quarter CPI.
Food prices rose 2.2 per cent in the quarter, mainly due to increases for grocery food, vegetables and restaurant meals and ready-to-eat food.
Higher electricity prices pushed the housing and housing utilities group up 1.2 per cent in the quarter.
Over the year, petrol prices have risen 26 per cent and this was the most significant contributor to the rise in the CPI. If petrol prices had remained constant, the CPI would have risen by 2.7 per cent.
The Reserve Bank is allowed to exclude external shocks when calculating whether it is meeting the 1-3 per cent inflation target. Despite signalling rate cuts ahead, the bank has forecast inflation will peak at over 4.7 per cent over the next year.
Today's figure is likely to push the New Zealand dollar - trading at US76.36c before today's announcement - higher as traders bet interest rates will stay up high for longer.
BNZ economist Stephen Toplis told NZPA inflation other than petrol and fool was actually falling sharply and well ahead of projections as demand had dried up.
"It will be a line-ball call," he said. "At the same time, the headline reading is 4 per cent and does the bank want to tell people it is happy with that?"
Ironically, high food prices are likely to dampen inflation as it takes money out of people's pockets.
Although the annual inflation rate was likely to jump to 5 per cent next quarter, deflation was a high risk as the economy tanked and this was a far worse danger than inflation, Mr Toplis said.
Other economists agreed on the probability of a rate cut.
Deutsche Bank's head of research David Plank said the fact that non-tradables inflation was below the RB's expectations "will make them confident that domestic price pressures have peaked and that should be enough to allow them to ease next week".
Goldman Sachs economist Shamubeel Eaqub said implications from the data were ambiguous given higher than expected non-tradables inflation. But that didn't materially alter the outlook.
"The Reserve Bank really doesn't need any more evidence of a recession, what it needs to see is increased confidence in the view that inflation is going to come off in the next 12-18 months. "We think they should cut from July, but we'd only give a 50:50 chance that they will."
ASB Bank economist Nick Tuffley said it was a tough call whether the OCR would be cut this month, but the high inflation numbers released today and prospects of a much higher one in the third quarter are "likely to put the brakes on a July OCR cut. We put a 45 per cent chance on the RBNZ cutting in July but at the margin expect the RBNZ to hold on until September before cutting the OCR."
"We assess the RBNZ will still see no dominating influence in the tug-of-war between high headline inflation and the associated risks for wage/price setting behaviour on one side and the disinflationary impact of a contracting economy."
However, the Reserve Bank can "argue the toss" for either side, said Tuffley. There was sufficient concern over the state of the economy - and market pricing leaning towards a July rate cut that could still prod the bank into action.
"We maintain - just - our expectation that the RBNZ will wait until September cut rates but would hardly fault the RBNZ for cutting the OCR next week," said Tuffley.
- NZPA