Inflation spikes - but that’s not the important bit

To no one’s surprise, this morning’s consumer price index (CPI) shows inflation rose 2.3% in the last quarter of 2010.

The rise is due primarily to the GST increase from 12.5% to 15% on October 1 and comes as about as much of a surprise as nightfall.

The 2.3% quarterly rise takes annual CPI inflation to 4% for the year. Both figures are bang on the consensus forecast.

It is the largest quarterly rise since September 1989 – the last time GST was raised.

So far, so ho-hum. None of this will shake anyone up and the Reserve Bank has said it will “look through” the GST rise when assessing its next interest rate move.

The more important bit comes tomorrow. We knew the GST rise would have this effect on prices: what we did not know was what effect it will have on the country’s already-strained retail sector.

We should know that by this time tomorrow. Retail sales for November are to be released.

Retail slumped 2.5% in October – again, a GST effect, following a pre-GST pick up in September.

The key issue will be whether those sales returned to some sort of growth. After a flat year, there could have been a pick-up in November: certainly a number of economists believe so. At this stage though it looks like a bold bet. Flat sales appears more likely – certainly electronic sales data already released for the last two months of 2010 do not give much cause for optimism.

It is important to remember these factors are historical. Most importantly of all for the country’s domestic economy - because it is forward-looking – is the latest ANZ-Roy Morgan consumer confidence survey, due out this afternoon.

That will give us an idea of how consumers feel about the coming year.

It is likely to show more optimism than we saw in 2010.

Rob Hosking
Thu, 20 Jan 2011

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Inflation spikes - but that’s not the important bit