Annual inflation tipped to rise 1.1% in 3Q, driven by food, rates

BUSINESSDESK: Inflation probably quickened in the third quarter, led by a seasonal rise in food prices and local authority rates in what will be the final period for the consumer price index to hold at historically low annual levels.

The consumer price index rose to 0.6% in the three months ended September 30, double the second-quarter rate, according to a Reuters survey of eight economists. The annual rate rose to 1.1% from 1%.

Annual inflation is at the bottom of the Reserve Bank's 1% to 3% annual target but that is likely to change by the final three months of 2012, with the bank predicting annual inflation to pick up to 1.9%.

That is because the drop in the CPI in the fourth quarter last year will have rolled off, while building costs are rising, partly reflecting the Christchurch rebuild.

"The confluence of forces that have helped to keep price pressures down for the last year or so are fading and we are now past the low point for annual inflation," Westpac Banking Corp senior economist Michael Gordon says.

The high kiwi dollar has contributed to the nation's tame inflation by keeping a lid on the price of imports ranging from mobile phones and computers to motor cars and aircraft parts. It has averaged 77.73 US cents so far this year, just above last year's average.

For the two previous years, the average was 58.2 US cents, based on Reuters data.

"While the dollar remains high, it is becoming less of a disinflationary force," Mr Gordon says.

The kiwi recently traded at 81.67 US cents, down from its high in September above 83 cents. The trade-weighted index, the central bank's preferred measure, was recently at 72.9, slightly above the average the bank is picking for the fourth quarter.

Westpac and ASB forecast the biggest increase for food prices last quarter. ASB estimates they jumped 1.1% in the third quarter, led by a seasonal 12% gain for fruit and vegetables which should abate in the fourth quarter.

But food prices will not be such a benign force in the year ahead. Drought in the US is likely to be felt through rising prices for grains and animal feeds, leading to more expensive dairy products and meat.

"We expect this will in turn flow through to higher prices at the retail level later next year," ASB chief economist Nick Tuffley says.

He cites housing shortages in Auckland and Christchurch for putting pressure on construction costs and rents, while the continued impact of higher reinsurance changes is likely to drive up insurance costs.

The Reserve Bank also cited housing pressures in its monetary policy statement last month, where former governor Alan Bollard kept the official cash rate at a record low 2.5%. But he also said the government's belt tightening, or fiscal consolidation, "is constraining demand growth".

Dr Bollard expects inflation will "settle near the mid-point of the target range over the medium term", meaning there is no pressure to raise interest rates any time soon.

Economists are also expecting an increase in the annual rate of excise on alcohol.