Price hikes little threat to CPI

By Joe Helm


Inflation is likely to rise only slightly if proposed increases in the price of electricity and local body rates materialise, according to bank economists.

Stefan Dunatov of HSBC Markets said if the general outlook was for a rise in the Consumers Price Index (CPI) then the proposed rise in electricity prices and local body rates would be a concern.

But there were probably enough negative influences on the CPI such as lower car and property prices to balance out the proposed rises.

Mr Dunatov said local body rates comprised 2.23 per cent of the CPI and electricity prices 2.8 per cent.

If rates rose by 25 per cent across the country as is proposed in some areas that would add roughly 0.6 per cent to the CPI. If electricity prices rose by 10 per cent across the board it would add about 0.3 per cent to the CPI.

"A worst case scenario is that the two influences combine in the one quarter and add about 0.9 per cent to the CPI for that quarter" he said.

Bank of New Zealand economists said that was unlikely to happen as electricity prices are surveyed monthly.

If TransAlta lifted its prices by 10 per cent on April 20, the rise would not show up until May and would be in the June quarter CPI for just two months. The impact would be felt fully in the September quarter.

The BNZ economists also said it was possible electricity prices would fall over time as the benefits of reforms flowed through.

ANZ Bank economists said the proposed price rises did not alter their view that headline inflation would climb to about 2 per cent by the end of the year. The Reserve Bank is forecasting a rate of 1.4 per cent.

Bancorp's Stuart Marshall said rises in rates and power prices could push inflation to 2 to 2.5 per cent. "There's nothing the Reserve Bank can do about it," he said.

"If higher prices are consistent it could be a concern but the rises may prove to be seasonal. I think they are unlikely to be long term."

Mr Marshall said he agreed with the Reserve Bank view there would be headline disinflation this year.