Rising inflation puts pressure on interest rates

The chance of the Reserve Bank raising official interest rates before the end of the year is rising, after a faster than expected lift in inflation during the June quarter.

Consumers price index (CPI) inflation was up 1 percent in the latest quarter from the previous three months, and up 5.3 percent for the year, Statistics New Zealand said today.

The annual increase included a 2.3 percent gain from the December quarter lift in GST from 12.5 to 15 percent. It was the largest annual rise since the June 1990 quarter, which also included a GST rise.

The median forecast in a Reuters poll of economists had been for a 0.8 percent rise in the latest quarter and a 5.1 percent gain for the year.

ANZ bank said the higher annual headline rate was not an immediate cause for concern, as it was strongly influenced by one-off factors.

Despite that, collectively core measures were clearly running above 2 percent, and with the high headline there were obvious risks to inflation expectations.

The data suggested a broadening in pricing pressure, and ANZ did not think wage and price setting would be as benign as the Reserve Bank had been expecting.

The current 2.5 percent official cash rate (OCR) was looking increasingly inconsistent with the inflation outlook, ANZ said.

While it was not "overly hawkish" on the outlook for the OCR, a hike before December could not be ruled out, and any upside surprise in inflation expectations or jobs growth would make a September hike the central case.

BNZ head of research Stephen Toplis said he expected the annual headline rate would remain above 5 percent in the September quarter.

"There is a great danger that consistently high inflation will change the price setting behaviour of firms and individuals alike, and that's when the real trouble for inflation fighters begins," Mr Toplis said.

The market awakening to inflation risks within the economy had pushed market pricing to such a degree that the central bank governor could no longer hide behind it.

For now BNZ would stick to its call that the Reserve Bank would raise the OCR in December, but only just. It was now a 50/50 pick between December and earlier.

ASB economist Christina Leung and chief economist Nick Tuffley said the high rate of inflation largely reflected a raft of Government charges implemented in the past year, including the GST rise, higher ACC levies, tobacco excise, and higher energy prices from the emissions trading scheme.

They believed the June figures would be the peak in annual inflation, and it should ease in coming years.

Food and petrol prices were key factors in the increase, with signs improved demand was also allowing retailers to recoup some operating margins in the prices of imported household items, particularly in clothing, footwear and household contents.

But the 0.6 percent rise in non-tradable inflation -- goods and services facing no foreign competition -- suggested inflation pressures were contained for now, the ASB economists said.

They were concerned at signs a pick-up in construction cost inflation from post-earthquake rebuilding was spilling over from Christchurch to the rest of the South Island.

The ASB economists said the inflation data reinforced their expectations the Reserve Bank would raise the OCR in December, but recent developments suggested it had little inflation headroom, with construction cost inflation a key area to watch.