Rates biggest contributor to inflation

The annual increase in local authority rates is expected to make the largest single contribution to the rise in inflation in the three months ended September.

Westpac economists estimate a 3.5% rise in the rates contribution compared with a 2.8% rise last year.

Increases in local authority rates continued to exceed general inflation, but the pace had steadily slowed, Westpac senior economist Michael Gordon said yesterday.

Other housing-related costs, such as new dwelling prices and rents, were expected to continue their steady climb although there was no real sign rent inflation has accelerated.

Statistics New Zealand releases its consumer price index (CPI), the official measure of inflation, on Thursday and economists pick the figure to be subdued and below recent Reserve Bank forecasts.

Westpac has predicted quarterly inflation to be 0.4% and annual inflation to fall to 1.1%, from 1.6% in June.

ASB chief economist Nick Tuffley is forecasting quarterly inflation at 0.5% and annual inflation to be 1.1%.

The Reserve Bank had an inflation target of 2%, the mid-point of its 1% to 3% agreed target with the Government.

Mr Tuffley also predicted local authority rates to have an impact on quarterly inflation but he expected construction costs would have continued to rise steadily given strong house building demand.

''We do not expect construction cost inflation will rise to the same extent as the ramp-up in construction activity.

"Strong net migration over the past year has increased labour supply and mitigated the increase in capacity pressures normally associated with such strong activity.''

Recent inflation indicators pointed to underlying inflation remaining contained over the remainder of the year, despite strong economic growth, he said.

Mr Gordon said food prices were the biggest seasonal influence on the CPI and were also the main factor behind the sharp drop in the annual inflation rate.

Food prices rose by 0.4% in September but a ''normal'' increase through the winter months was usually well above 1%.

The more subdued rise in prices this year compared with last year shaved 0.25% off the annual inflation rate.

Some of the shortfall in food prices this year was due to vegetables, reflecting favourable growing conditions over winter.

''Lower-than-usual prices in winter doesn't mean they will be lower in summer.

"But there have been other factors that could linger for longer such as the supermarket price war on bread, and cheaper dairy products as world prices fell to unusually low levels,'' he said.

The other factor behind the fall in annual inflation was petrol prices.

While pump prices rose 1.6% in the quarter, that compared with a 5.6% rise at the corresponding time last year.

With petrol making up 5% of the CPI, the difference reduced annual inflation by 0.2%.

 


Inflation forecasts

• September quarter: 0.4% rise; September year down to 1.1% from 1.6% in June.

• Local authority rates to have large impact.

• Lower food prices and smaller petrol price rises will shave inflation.

• No sign of rent inflation.


 

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