21 Jan 2014

Cost of living edges up

9:51 pm on 21 January 2014

Annual inflation has risen at its fastest pace in nearly two years. Official figures show inflation rose to 1.6 percent in the year to December, with housing-related costs making up half the increase.

The Consumer Price Index rose 0.1 percent in the December quarter compared with the third quarter of last year. The expanding economy is expected to inflame inflation pressures, though Tuesday's figures from Statistics New Zealand show that prices remain in check for now.

Air fares, housing costs and dairy product prices rose in the December quarter, offset in part by seasonal declines in vegetable prices and cheaper petrol.

On an annual basis, inflation stood at 1.6 percent, which is in the lower half of the Reserve Bank's target band but it is picking up due to the growing economy.

Nearly half of the increase is due to the housing market, with rises in house building costs, rents, rates as well as electricity prices.

That is particularly true of overheated markets in Auckland and Christchurch, where the Reserve Bank is concerned that rising construction costs will spill over into higher prices and wages.

Some economists say there are signs that is starting to emerge. The central bank expects to lift the interest rate from its current record low of 2.5 percent this year, and most analysts expect a rise in March when the bank will release its next monetary policy statement.

However, some economists are predicting that the Reserve Bank will raise its Official Cash Rate as soon as 30 January.

Data a surprise

ASB Bank chief economist Nick Tuffley said the data was a fairly significant surprise and was about 0.3 percent different from the Reserve Bank's expecations for the quarter.

"The extent of the increase in the inflation figures relative to expectation is getting to that grey area of being significant."

The part of inflation which was mainly driven by capacity pressures, particularly inflation in constuction and housing, was quite contained and in line with general expectations, so there was no strong sign there had been an upsurge in underlying inflation pressures which would concern the Reserve Bank, Mr Tuffley said.

However, international and domestic airfare inflation was stronger than expected, as was clothing and household items. The latter was surprising given the strength of the New Zealand dollar he said.

"So there are some tentative signs that some retailers are regaining a little bit of pricing power after margins have been under pressure for a long, long time."

Dollar jumps

The New Zealand dollar jumped more than half a cent against the US and Australian currency and wholesale interest rates rose after the figures were released.

The dollar rose as high as 83.36 US cents and 94.48 Australian cents on Tuesday afternoon before dropping to 83.22 US cents just after 5pm.