Inflation remains at 2.8 per cent

Inflation rose 0.9 per cent in the June quarter according to Statistics New Zealand's Consumer Price Index (CPI) out today.

That left annual inflation unchanged from the March quarter at 2.8 per cent -- still uncomfortably close to the top of the 1 to 3 per cent inflation band the Reserve Bank (RB) is mandated to maintain.

RB Governor Alan Bollard has said he will lift interest rates again if inflation looks likely to head higher but some economists believe that would be a mistake given the speed at which the economy is slowing.

Recent economic indicators including May retail sales figures and the New Zealand Institute of Economic Research's business confidence survey have suggested the economy is slowing quite rapidly -- reducing inflation pressures.

However, recent steep rises in petrol and power prices, with knock-on effects in transport and other sectors, may give inflation another nudge up.

Today's data is unlikely to help Dr Bollard decide on interest rates.

The most significant quarterly cost increases came from higher prices for housing, transportation and household operation.

"It makes Dr Bollard's decision slightly harder than it might have been going into today with the domestic side of things remaining particularly strong," said ANZ National bank economist Sean Comber.

However, he added: "It's not the smoking gun that they are looking for, particularly with the signs of the real economy starting to slow down."

He said the main surprise was the strong rise in the cost of housing and that international air fares did not rebound from the March quarter's surprise steep fall.

Mr Comber said he still does not expect Dr Bollard to hike interest rates at the bank's next review on July 28.

"If the domestic pricing story hadn't been as strong as it was, it would have been easier for him to leave rates on hold. He wouldn't have had to think about. Now, he might think about it a little bit but still not put rates up."

Mr Comber said the RB will be allowed to ignore some of the rise in fuel prices because some had come from the increase in excise taxes and because much of the rise had been the result of an "external supply side shock".

He said motorists could expect further nasty surprises, particularly if the New Zealand dollar sinks lower, as ANZ National expects.

The kiwi eased a touch on the news, trading at US67.23c by 11.15am, against its US67.31c local open.

Inflation is seen hanging close to 3 per cent for some time, so any fall in interest rates is unlikely to happen until at least the middle of next year.

Housing costs (not house prices) increased 1.7 per cent in the quarter, mainly due to prices rises for the purchase and construction of new dwellings (up 2.2 per cent) and an 8.7 per cent rise in real estate agents' fees.

Transport prices increased 2.1 per cent in the quarter with the biggest increases coming from petrol (up 7.1 per cent) and car insurance (up 4.2 per cent).

If petrol prices had remained unchanged in the quarter, the CPI would have only risen 0.6 per cent.

Household operation costs rose 0.5 per cent with a 1.3 per cent rise in power prices a significant contributor.

Over the year, the most significant increases were in prices for the purchase and construction of new houses, up 7.6 per cent, electricity, up 8.1 per cent, and petrol, up 7.0 per cent.

Fresh vegetable prices fell 10.2 per cent, while communication and equipment prices fell 2.5 per cent as did international air fares.

In the June quarter, the non-tradeable component made up the largest contribution to the CPI (1.1 per cent) while the tradeable component increased 0.6 per cent.

Also released today, the Food Price Index for June showed prices remained static in the month. Prices decreased for meat, fish and poultry and fruit and vegetables. Prices increased for restaurant meals; grocery food; soft drinks and confectionery.

The FPI rose 1.5 per cent in the June year, just up from the 1.4 per cent rise in the May year.

- NZPA