KEY POINTS:
Red lights are flashing and klaxons blaring among the inflation indicators in the Institute of Economic Research's latest quarterly survey of business opinion.
Those warning signs will only increase the pressure on Reserve Bank Governor Allan Bollard to raise the official cash rate this month.
The survey showed more firms were pessimistic about the general business situation for the next six months, with pessimists outnumbering optimists by 15 per cent. In December a net 3 per cent saw better times ahead.
Institute director Brent Layton said that most likely was because the survey followed hard on the heels of last month's increase in the official cash rate.
But firms' views of their own activity over the next three months - a more reliable pointer - has improved, suggesting the pick-up in economic growth recorded in the gross domestic product statistics for December will continue.
The Reserve Bank and money markets watch the survey closely because its long history means economists can plot how well it matches later measures of growth, inflation, employment and so on.
"The inflation indicators are not much comfort for borrowers," Layton said. "It's hard to see how, if this were the only information the governor had, he would get away with only one interest rate rise this year."
A net balance of 41 per cent of firms reported it was harder to find skilled labour, up from 28 per cent in December. For unskilled labour a net 21 per cent found it harder compared with 11 per cent three months ago. The proportion of firms citing the availability of labour as the main constraint on output rose to 22 per cent from 19 per cent.
Employment expectations softened slightly, but Layton said that could as easily reflect doubts about their ability to find suitable new staff as a decrease in the need to hire them.
Another key indicator of how much spare capacity there is in the economy, capacity utilisation by manufacturers and builders, eased very slightly from 91.8 to 91.7 per cent. But it remains high by historical standards.
A net 7 per cent of firms intend to invest more in plant and machinery this year. While that is down from a net 13 per cent three months ago it is still positive by historical standards.
Indicators of costs and prices worsened. A net 49 per cent of firms said their costs had risen in the past three months, up from 40 per cent in December. Expectations of cost increases have also climbed.
A net 27 per cent of firms increased their own prices over the past three months, up from 21 per cent in December, and a net 40 per cent of firms expect to raise their prices, up from 28 per cent three months ago.
The last time pricing intentions were this high was in mid-2000, just before inflation spiked to 4 per cent.
Profitability, both reported and expected, declined.
Following the QSBO's release money market pricing implied a 40 per cent probability that Governor Alan Bollard would raise the official cash rate from 7.5 per cent on April 26, according to Credit Suisse's swaps-base indicator. Before Easter it put the chances at 32 per cent.
"If it were not for the steep rise in fixed mortgage rates in recent weeks we expect that today's QSBO survey would have seen the market move to price a greater than 50 per cent likelihood [of a rate rise this month]," said Deutsche Bank chief economist Darren Gibbs.
ANZ National bank chief economist Cameron Bagrie remained sceptical that the rebound in growth would continue into the second half of this year. There was more pressure on mortgage rates still in the pipeline, and that tightening would have its greatest impact by mid-year, he said.
But the Reserve Bank could not ignore the inflationary messages and would talk tough to keep rates up.
Mixed messages
* Pessimists outnumber optimists by a net 15 per cent about the general business environment over the next six months. In December a net 3 per cent saw better times ahead
* But a net 18 per cent expect their own firms to be busier over the next three months, up from 13 per cent three months ago
* Manufacturers expect a small pick-up in output, driven by higher exports - despite the high dollar - rather than New Zealand sales. Their hiring and investment intentions are slightly stronger.
