Spike in petrol prices pushes inflation up

A jump in petrol prices is expected to have pushed inflation close to 2 per cent in 2017, but interest rate hikes could still be a year away.

Statistics New Zealand will tomorrow update the consumer price index (CPI) for the final months of 2017, and it is expected to show household inflation stayed at 1.9 per cent.

Economists expect inflation in the final three months of the year will have been around 0.4 per cent, about half of which came from a spike in petrol prices, which hit a three-year high in October.

Inflation has a direct influence on the way the Reserve Bank determines the official cash rate (OCR), which was cut to an alltime low of 1.75 per cent in 2016, amid fears that inflation expectations were dropping.

But if the CPI comes in as expected, inflation will now have been close to the Reserve Bank’s target – as close as possible to the middle of a 1-3 per cent band – for 12 months, which would tend to suggest the OCR should be hiked.

ASB, however, sees the official cash rate staying unchanged for at least another 12 months.

‘‘Although the headline CPI figure is expected to pick up, we believe this firming is not broadbased but is confined to a few pockets of the economy where capacity pressures are particularly intense,’’ ASB chief economist Nick Tuffley said, pointing to sharp increases in constructionrelated costs.

Economists broadly agree that inflation will dip at the start of 2018, as the sharp increase in food prices seen at the start of 2017 comes out of the equation.

The new Labour-led Government’s decision to give new tertiary students a year of free fees will also trim the accommodation component of the CPI.

BNZ sees annual inflation falling to 1.5 per cent in the first half of the year, which senior economist Craig Ebert said could prompt further delays to the Reserve Bank’s plans to increase interest rates.

‘‘It will belie much of the capacity pressure in the economy, but could yet engender more delay with respect to OCR normalisation.’’

Kiwibank senior economist Jeremy Couchman said the first signs of a more sustained increase in inflation may be emerging, with some signs in the recent quarterly survey of business opinion.

‘‘Firms are noting that their costs are rising and they’re looking at passing on those costs. Also the capacity constraints faced by the construction sector are also likely to feed a bit more broadly into inflation.’’

Petrol prices had stabilised at the start of 2018, with a rising dollar offsetting climbing oil prices, which are close to a three-year high.

‘‘If the currency starts to reverse a bit tradeable inflation could increase,’’ Couchman said.

Kiwibank has forecast that the Reserve Bank will begin to increase the OCR from November.