Inflation may inch back to mid-point of band in fourth-quarter

Rising fuel prices, housing costs and an ongoing influx of tourists may have pushed annual inflation back to the mid-point of the central bank's target band but economists say tepid pressures elsewhere will keep the interest rates firmly on hold.

Economists expect the consumers price index rose 0.4 percent in the three months ended Dec. 31, for an annual increase of 1.9 percent, according to the median in a poll of 13 economists surveyed by Bloomberg. Five of the 13, however, see it at 2 percent or above. That compares to the Reserve Bank's quarterly projection of 0.3 percent for an annual rise of 1.8 percent. The data is due on Jan. 25.

ASB Bank expects inflation to have lifted 0.5 percent in the quarter and 2 percent for the year but said it was largely due to one-off movements, such as a sharp jump in petrol prices. "A contained backdrop for overall inflation should encourage a period of stability in official cash rate settings," chief economist Nick Tuffley said.

The central bank has signalled the official cash rate won't rise from 1.75 percent until June 2019 at the earliest.

The Reserve Bank is mandated with keeping annual inflation between 1-and-3 percent over the medium term with a focus on the mid-point. However, inflation has remained stubbornly weak, only pushing up to a 2.2 percent annual pace briefly in the March quarter before dipping back to 1.7 percent in the June quarter and 1.9 percent in the September quarter.

Westpac Banking Corp senior economist Michael Gordon said the most significant price increases in the December period related to travel. Petrol prices were up 6 percent and diesel prices rose 10 percent, reflecting higher world oil prices and a weaker New Zealand dollar, he said. Petrol prices were at their highest since the September 2015 quarter. Seasonal increases in airfares, car rentals and local accommodation also contributed and rising fuel costs over the past year will also have put some upward pressure on airfares, he said.

Gordon said the largest negative contribution will be a 1.6 percent drop in food prices, which is entirely seasonal. Westpac is tipping inflation to lift 0.4 percent on the quarter and 1.9 percent on the year.

ANZ Bank New Zealand senior economist Phil Borkin said he expects annual CPI inflation to hold steady at 1.9 percent while rising 0.4 percent quarter-on-quarter. Borkin also said that outside of housing the "evidence of a lift in domestic inflation pressure will be tentative at best." Within housing, energy prices are expected to have increased 0.8 percent quarter-on-quarter while rental inflation is expected to have gained at a similar pace to the prior quarter when it lifted 0.5 percent.

Borkin retains the view that domestic inflation will rise and broaden in time, largely predicated on the belief that a cyclical low in wage inflation has passed and that the combination of skill shortages and government policy changes, wage inflation will increase. "However, it is far from a clear picture," he said, pointing to recent movements in oil prices and the New Zealand dollar, the ongoing impact of structural deflationary forces, and the likelihood of average activity growth for the next year at best.

"It is this mixed picture that we suspect will leave the RBNZ somewhat cautious and side-lined for some time yet," he said.

(BusinessDesk)