Food and fuel driving inflation

Higher food, petrol and tobacco prices will have pushed headline inflation up in the three months ended March but the Reserve Bank is unlikely to be too worried by the result.

Economists are picking inflation to have risen to between 4.6% and 4.9%, well above the central bank's policy target agreement of between 1% and 3%.

Statistics New Zealand will this morning release the consumer price index (CPI), the official measure of inflation.

Westpac senior economist Dominick Stephens said the main cause of the higher living cost in the March quarter was a familiar suspect - fuel.

Petrol prices at the pump were 9.4% higher in the March quarter, compared to the three months ended December.

Last October's GST increase from 12.5% to 15% would have a lingering effect on quarterly inflation. Some firms that refrained from immediately passing on the GST hike might have done it between January and March this year, he said.

"More importantly, some prices will only register the GST increase at the time of their annual reset. For example, the annual increase in university fees occurred in the March quarter and is recorded in the CPI at that time."

This year, fees rose by more than 6% as the higher rate of GST was applied, Mr Stephens said.

ASB chief economist Nick Tuffley said he expected higher food, petrol and tobacco prices to be the key drivers behind an expected 1.2% increase in the CPI in the quarter.

Higher food and fuel prices were likely to remain the key inflation themes over the remainder of 2011, given the continued increase in global commodity prices.

Inflation indicators in the latest business confidence surveys pointed to inflation pressure in the New Zealand economy being contained for now. However, Mr Tuffley expected inflation pressures to re-emerge next year as the improvement in demand allowed businesses to pass on rising costs.

Added to that, rebuilding activity next year was likely to place capacity pressures on the building sector and lead to acceleration in construction costs.

"The Reserve Bank is relying on some very weak inflation outcomes over the coming years to get annual CPI back to within its target band. We expect the Reserve Bank to become less sanguine about inflation next year as a lift in underlying inflation becomes apparent," he said.

Mr Stephens said 4.8% inflation might sound high but it would not necessarily faze the Reserve Bank.

The central bank still believed that inflation would settle comfortably in the middle of its target band during 2012. That view was unlikely to be altered by the March quarter CPI.