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Home / Business / Companies

Cigarettes and alcohol boost prices

Brian Fallow
By Brian Fallow
Columnist·NZ Herald·
19 Apr, 2012 05:30 PM4 mins to read

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Higher cigarette and tobacco prices have contributed to a rise in the consumers price index. Photo / Brett Phibbs

Higher cigarette and tobacco prices have contributed to a rise in the consumers price index. Photo / Brett Phibbs

Benign inflation numbers for the March quarter are expected to keep the Reserve Bank on hold until December at the earliest.

The consumers price index (CPI) rose 0.5 per cent for the quarter, which pulled the annual inflation rate down to 1.6 per cent from 1.8 per cent in calendar 2011. Most of the increase - 1 percentage point - occurred in the June quarter last year.

More than half the quarter's CPI rise was due to a 13.5 per cent increase in the tax on tobacco, without which the annual inflation rate would have been 1.3 per cent.

Petrol, up 2.3 per cent, accounted for another quarter of the increase, though that was fully offset - for those who can afford such things - by a seasonal drop in international air fares.

Rents rose 0.9 per cent in the quarter, making 2.3 per cent for the year, driven by rises in the South Island and Auckland.

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"Given how smooth and slow moving the rental series typically is in the CPI, the increase in the March quarter is relatively sharp and concerning," ASB economist Jane Turner said.

Bank of New Zealand economist Craig Ebert said the jump in rents was related to supply problems in Christchurch, because of the earthquake destruction, and in Auckland, because of population growth.

"[It is] something that is unlikely to resolve itself until there is a big construction response. This may take a while."

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Construction costs rose 0.7 per cent.

"While this is hardly high, the point is that it's going up at all, given the supposed recessionary conditions in the construction sector. We shudder to think where construction sector inflation will get to when activity actually ramps up, as it is still widely expected to do and only partly because of reconstruction in Canterbury," Ebert said.

"We continue to think the Reserve Bank is heroic in its belief that the construction sector won't experience any material inflation over the coming period, partly on the basis that economies of scale will help cap things. We can sense a clash of theory and practice in this."

Tradeables prices - reflecting those parts of the CPI influenced by international competition and the exchange rate - fell 0.4 per cent in the quarter to be up 0.3 per cent for the year. Non-tradeables inflation was 1.2 per cent, making 2.5 per cent for the year.

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"Normally, this pattern would suggest persistent underlying inflation pressures that would be of concern to the Reserve Bank," ANZ economist Mark Smith said.

However, half of the latest increase was due to the tobacco excise increase.

Other increases not related to demand in the economy were an 18 per cent rise in dwelling insurance, driven by higher Earthquake Commission levies, and a 3.6 per cent hike in tertiary education fees.

Measures of core or underlying inflation are clustered around the mid-point of the Reserve Bank's target range of 1 to 3 per cent.

"All up, the Reserve Bank has a good inflation starting position and time is on its side," Smith said.

The bank would be reluctant to raise the official cash rate pre-emptively from its all-time low of 2.5 per cent.

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"It will take evidence of a sustained lift in core inflation from a number of price, activity and capacity sources to trigger OCR hikes. This looks a way off, with the labour market treading water, the currency elevated and commodity prices softening," he said.

Big movers

Consumers price index, March quarter:

GOING UP
* Alcohol and tobacco: +4.7 per cent
* Education: +3.1 per cent
* Misc. goods and services: +1.3 per cent

GOING DOWN
* Recreation and culture: -2.4 per cent
* Clothes and footwear: -0.6 per cent
* Communication: -0.2 per cent

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