20 Apr 2017

Housing, food, fuel drive higher inflation

2:03 pm on 20 April 2017

Inflation has spiked to its highest level in more than five years, driven by higher costs in housing, food, and fuel.

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Photo: 123rf.com

Official numbers show inflation of 1 percent for the three months ended March, pushing the annual rate to 2.2 percent, the highest since mid-2011.

The rise was stronger than expected and the New Zealand dollar jumped across the board, gaining about 0.25 cents against the US dollar.

Bad weather caused a sharp rise in fresh fruit, a jump in world oil prices forced higher fuel costs, while the strong housing market is forcing up the cost of new houses and rents.

The annual rise in tobacco duties also boosted inflation.

Inflation is now just above the midpoint of the Reserve Bank's one-to-three percent target band, but that was not expected to force any change in its interest rate policy.

Last month the bank said it would discount the effect of volatile food and fuel prices, and other one off factors such as the tax increase for cigarettes.

The RBNZ has signalled it expected to start raising its benchmark interest rate at the end of 2019, but the general view of economists was that rate rises could be expected from the middle of next year.

An economist said underlying inflation was a bit more subdued, once volatile fuel and food rises and one-off tax rise were excluded.

"We expect the current lift in headline inflation will be temporary, as does the RBNZ ... Nonetheless, we expect annual inflation to hover around 1.5 and 2 percent over the next few years," said ASB chief economist Nick Tuffley.

He said the Reserve Bank would be pleased to see inflation back in its target band, but it would likely have to bring forward when it starts raising its benchmark interest rate.

"We continue to expect the RBNZ will lift the official cash rate in late 2018, around a year earlier than the RBNZ's February view."

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