New Zealand consumer prices rose 2.3 per cent as expected in the three months ended December 30, mainly reflecting the hike in goods and services tax and suggesting the Reserve Bank won't rush to raise interest rates.

That's the biggest quarterly gain since a 3.5 per cent rise in September 1989, the last time GST was lifted. Statistics New Zealand said the impact of the consumption tax increase was about 2 percentage points, meaning the underlying rate was a more benign 0.3 per cent.

The quarterly inflation figure is bang-on Reserve Bank and consensus forecasts, confirming the bank's expectations underlying inflation pressures won't force a hike in the official cash rate, currently at 3 per cent.

The underlying figure means Bollard won't be under any pressure to bring forward tighter interest rates after he took a breather in the latter half of last year amid a stalling economic recovery that narrowly dodged dipping back into recession.

Statistics New Zealand prices manager Chris Pike told a media briefing in Wellington the lowest pass-through of the GST hike to 15 per cent from 12.5 per cent in October was from outlets selling home appliances and furniture and department stores.

About 10 per cent of prices collected increased in line with the GST hike, half rose by a smaller amount, and just one-in-four of surveyed prices rose by more than the tax hike, he said.

Goldman Sachs NZ economist Philip Borkin said today's CPI numbers were, in line with consensus and Reserve Bank expectations.
"Stripping the GST impact out, underlying price pressures still look contained."

Borkin said about 91 per cent of the "CPI basket" was subject to GST, with rents, education donations and credit services the major exceptions. The GST increase would theoretically have led to a CPI increase of 2 per cent.

"The uncertainty heading into this release surrounded the degree to which firms chose to pass this increase on. Did they use it as an opportunity to push through other price rises, or did the soft demand backdrop mean they had to absorb at least some of it in their margins?" asked Borkin

"The answer to this appears to be both, although stripping out the GST effect, underlying price increases look relatively mild."

Headline CPI is expected to peak at 4.9 per cent in the second quarter of this year, said Borkin.

He said that given the lacklustre recovery to date and the still negative output gap, he felt the focus for the Reserve Bank should be on "ensuring the robustness of the economic recovery."

There would be little change in the message coming from the Reserve Bank at next week's Official Cash Rate review, said Borkin, and he continued to believe the Reserve Bank could hold off any further tightening of monetary conditions until September this year.

ASB bank economist Christina Leung said the CPI figure showed the "pass-through" of GST into prices was slightly less than expected.

"As such, tradable inflation was weaker than we expected, reflecting the difficulty retailers of imported goods have in passing on higher costs given household demand remains subdued."

Higher petrol prices was a key driver of inflation in the quarter, with the 6.8 per cent increase in petrol prices contributing just over 0.3 per cent to the 2.3 per cent increase in overall CPI, said Leung.

"Recent inflation indicators, including cost expectations and pricing intentions, suggesting inflation pressures are contained for now. Combined with recent soft activity data and low appetites for credit, there is little urgency for the Reserve Bank to resume the reduction of monetary policy stimulus," said Leung.

"We expect the Reserve Bank will wait until the September meeting to lift the OCR."

Gross domestic product shrank 0.2 per cent in the December quarter as consumer spending stayed in the doldrums with households looking to repay debt rather than ramp up expenditure.

Annual inflation was 4 per cent, outside the central bank's 1 per cent to 3 per cent target band, though Governor Alan Bollard is able to look through one-off impacts such as the tax increase.

Finance minister Bill English said inflation was forecast to remain relatively muted for the foreseeable future, Finance Minister Bill English says.

"Price increases put pressure on families, particularly after the difficult economic times we've had in the past two or three years," he said in a press release. "So it's important that we do all we can to take pressure off prices and interest rates.

"Other than the one-off impact of the GST rise and recent petrol price increases - which reflect higher oil prices on world markets - general underlying inflation in the December quarter remained relatively modest.

"In terms of the GST rise, New Zealanders on welfare benefits, Working for Families and New Zealand Superannuation were immediately compensated for this on 1 October.

"Taxpayers across all income bands also received personal tax cuts, which left someone on the average wage about $15 a week better off from the income tax/GST switch."

"It's encouraging that the central bank is not seeing any significant changes in price or wage setting behaviour as a result of the rise in GST, given the offsetting reduction in personal income taxes," said English.

Petrol prices reported the biggest increase, said Statistics NZ, up 6.8 per cent in the period and 14.2 per cent annually, due to the GST increase, and higher excise duties and international prices. The transport group reported a 4.3 per cent increase in prices for the quarter, bolstered by a 5.5 per cent rise in international flights and a 7.1 per cent lift in domestic air travel.

Service price gains outpaced goods, up 2.8 per cent compared to 2 per cent in the quarter, as retailers were forced to discount goods amid soft consumer spending. Clothing prices fell 0.2 per cent in the quarter, while glassware, tableware and household utensils dropped 0.4 per cent.

Audio-visual and computing equipment prices fell 1.7 per cent and telecommunications equipment dropped 6.1 per cent in the period.

A Goldman Sachs & Partners report yesterday showed retailers are feeling the pinch and will have to tighten their belts further this year, with the investment bank predicting retail sales will grow just 1.4 per cent over the coming year, half a percentage point lower than last year.

Food prices rose 2.1 per cent in the quarter, though the food price index, released earlier this week, registered monthly declines in November and December, trimming the annual gain to 4.9 per cent, with fresh milk prices surging 14.6 per cent in the biggest individual increase. A 2.7 per cent increase in grocery prices was the biggest contributor to the group.

Dairy prices remained strong last year after bouncing back from a low in mid-2009, and extended gains in Fonterra Cooperative Group's online auction this week. Central bank Governor Bollard expects farmers will be able to cash in on the upswing in commodity prices later this year once they've repaid their debt, and that will help kick-start the economy.

Statistics NZ said the increase in GST may not be reflected by some seasonally available items, and will come through in releases later this year.

Tradables inflation rose 2.5 per cent, while non-tradables increased 2.2 per cent, showing the greater impact of the GST hike on goods and services facing foreign competition.