The consumers price index (CPI) rose 1.1 per cent for the September 2010 quarter, Statistics New Zealand said today.

"The September quarter rise in consumer prices reflects higher food prices and higher central and local government charges, some of which usually occur at this time of year," Statistics New Zealand's prices manager Chris Pike said.

The CPI measures the rate of price change of goods and services purchased by households and today's 1.1 per cent result is largely in line with market forecasts.

It rose 1.5 per cent for the year to the September 2010 quarter. This annual increase is the lowest since the year to the March 2004 quarter.

The Reserve Bank forecasts the annual inflation rate to peak at 4.8 per cent by the middle of next year but then to fall back to 2.2 per cent a year later.

The food group rose 2.4 per cent in the September 2010 quarter, with higher prices for vegetables (up 19.7 per cent) and milk, cheese, and eggs (up 5.2 per cent).

ASB Bank economist Christina Leung said this morning's CPI result was "a touch below our expectations, but stronger than what the Reserve Bank forecast" last month.

Leung said she estimated roughly 1.5 per cent of the 2.5 per cent increase in energy prices was related to the implementation of the Emission Trading Scheme.

Leung said there was an increase in the proportion of items in the CPI basket which increased in price, suggesting that inflation was becoming more broad-based.

"Although the Q3 CPI result is stronger than the Reserve Bank's forecast in the September Monetary Policy Statement, the Reserve Bank is unlikely to be troubled by today's outcome," said Leung.

"The 1.5 per cent annual increase is the smallest annual increase since March 2004. However, the detail within the Q3 CPI release suggests inflation pressures are picking up."

CPI data from the next quarter would be the "crucial test" of how much businesses had managed to pass on the October 1 GST increase.

"We expect this and various Government charges will boost annual headline CPI to over 5 per cent by the middle of 2011. The Reserve Bank has made the optimistic assumption that in the face of this spike in headline CPI, medium-term inflation expectations will decline over the coming years."

Leung said she expects the Reserve Bank to lift the Official Cash Rate by 25 basis points in March next year.

Council of Trade Unions policy director and economist Bill Rosenberg said the latest figures were the "calm before the storm".

"The rise in GST along with other government charges and policy decisions will together mean big increases in prices. The next three annual increases are likely to be over 4 percent with some possibly over 5 percent, probably peaking in June. This is going to be a difficult time for many workers and their families."

"However the good news is that underlying inflation is probably quite low. Unless retailers take advantage of the GST rise to hike prices, the Reserve Bank can afford to keep interest rates down for some time."

Finance Minister Bill English has just issued a press statement saying the lowest annual inflation rate in more than six years "confirms that cost of living increases have generally been low and real wages are gradually increasing".

"Not only are price increases significantly lower across the board under National, but real and after-tax wages have increased, said English.

"The tax package this month will leave the vast majority of New Zealanders better off, with incentives to save and get ahead under their own steam."

Bernard Doyle, economist at Goldman Sachs JBWere pointed out that main increases in the so-called "non-tradeable" parts of the CPI - which are those immune from international competition or exchange rate changes - came from increases in local body rates (up 4.2pc quarter-on-quarter) and energy prices (up 2.5pc).

They were not coming as a result of any "capacity pressure" in the economy.

This meant they were of less relevance to the Reserve Bank - " particularly if they don't impact future wage setting or price expectations," said Doyle.

"Next quarter will see the GST increase wash through inflation, and we expect this to push annual inflation through 4 per cent," he said. "However as long as the Reserve Bank remains comfortable that this is not impacting second round pricing behaviour, in our opinion it is unlikely to have much impact on the outlook for monetary policy."

Statistics NZ said about one-quarter of the electricity increase was due to retailers charging 15 per cent GST on electricity consumed in the September month and invoiced in October.

In the year to the September 2010 quarter, transport prices rose 3.7 per cent, reflecting higher petrol prices (up 5.8 per cent). Housing and household utility prices rose 2.4 per cent.

The most significant downward contribution came from a fall of 24.6 per cent for audio-visual equipment, which is the largest annual decrease since the series began in the June 1999 quarter.

- NZ HERALD