Food prices jump to 18-year high

Soaring food and petrol prices pushed annual inflation up to 4% in the June year after the Consumer Price Index (CPI) leapt a higher than expected 1.6% in the June quarter, Statistics New Zealand said today.

The department also reported food prices rose 8.2% in the year to June - the highest rise in the Food Price Index (FPI) for 18 years.

The annual inflation rate had been 3.4% in the March year and the rate has now been outside the Reserve Bank's 1-3% target band for three successive quarters.

Economists on average had forecast a 1.4% rise and an annual rate of 3.8%.

The June quarter rate -- the highest quarterly rise in 18 years - will dampen hopes the Reserve Bank will trim the Official Cash Rate at its review on interest rates on Thursday-week.

Bank Governor Alan Bollard has signalled he will cut rates, probably starting in September, as a result of a steeply slowing economy, but some economists have called for him to act sooner.

BNZ economist Stephen Toplis told NZPA that it would depend on how the Reserve Bank assessed core inflation, which was actually falling sharply with the economy.

"It will be a line-ball call," he said.

SNZ said food prices rose 1.3% in the month of June with fruit and vegetables up 5.2%, meat poultry and fish up 1.3% and grocery food up 0.4%.

On an annual basis, grocery food was up 12.1% and within this category, milk was up 22%, cheddar cheese 62%, bread 15% and butter 87%.

Fruit and vegetables were up 9% for the year while meat, poultry and fish 4.4%.

The Food Price Index makes up just over 17% of CPI.

A 4.9% rise in transport prices, fuelled by a 13% rise in petrol prices, was the main factor in the jump in the June quarter CPI.

Food prices rose 2.2% in the quarter, mainly due to increases for grocery food, vegetables and restaurant meals and ready-to-eat food.

Higher electricity prices pushed the housing and housing utilities group up 1.2% in the quarter.

Over the year, petrol prices have risen 26% and this was the most significant contributor to the rise in the CPI. If petrol prices had remained constant, the CPI would have risen by 2.7%.

The Reserve Bank is allowed to exclude external shocks when calculating whether it is meeting the 1-3% inflation target. Despite signalling rate cuts ahead, the bank has forecast inflation will peak at over 4.7% over the next year.

Today's figure is likely to push the New Zealand dollar - trading at US76.36c before today's announcement - higher as traders bet interest rates will stay up high for longer.