Inflation up 0.1% - economists

Michael Gordon.
Michael Gordon

Economists are expecting this week's consumer price index (CPI) to come in weaker than the Reserve Bank's expectation, notching up a 0.1% rise rather than the central bank's expected 0.3%.

The CPI data, measuring inflation in the economy, is due out tomorrow for second quarter trading to June, with expectations of weaker inflation, influenced by the decline in fuel prices during the quarter, and flat tobacco prices. The latter's annual 10% price hike was posted in January.

ASB economist Kim Mundy said ''key drivers'' for the second quarter would be the 2.7% decline in fuel prices, 8.2% rise in fruit and vegetable prices and 0.6% rise in rents during the period.

She expects the CPI to soften from its first quarter 1% spike and rise just 0.1% quarter on quarter, with the annual inflation rate coming in at 1.9%.

''Underlying inflation will remain subdued in the second quarter and it is likely to be some time before underlying inflation picks up to a level consistent with the Reserve Bank raising interest rates,'' she said.

Westpac acting chief economist Michael Gordon expected a 0.1% rise in CPI, which would reduce the annual inflation rate from 2.2% to 1.8%

''New Zealand's inflation figures are often thrown around by temporary factors, and so far this year has been no different,'' Mr Gordon said.

There was an unusually large 1% rise in prices during the March quarter, led by gains in food and fuel prices, he said.

''Those two items will also play an important role in the June quarter figures, though this time their net impact on the inflation rate will be negative,'' he said.

Taking out food and fuel prices gave a clearer picture of where inflation was heading.

Inflation had bottomed out some time in 2015 and had since risen gradually, though it remains below the 2% midpoint of the Reserve Bank's target band.

''This is consistent with our view that while the economy is growing at a solid pace, it's not at risk of overheating,'' Mr Gordon said.

Ms Mundy expected the Reserve Bank to hold the interest-driving official cash rate at 1.75% until late 2018, but Mr Gordon expected it to be unchanged until 2019.

Ms Mundy said that domestically, she expected inflation to remain soft, apart from a few key sectors, most notably accommodation, construction and, increasingly, rents during the second quarter.

''GDP (gross domestic product) growth has been subdued recently and wage growth also remains soft,'' she said.

Although global economic conditions were improving, Ms Mundy said the inflation impetus of this improvement appeared to remain some way off.

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