Rising inflation ‘well-contained’

Inflation is running near the middle of the Reserve Bank’s target range, but don’t expect that to translate into any immediate move in the official cash rate.

Statistics NZ said yesterday the consumer price index (CPI) was up 1.9 per cent, year-on-year in the September quarter, and up 0.5 per cent on June. It follows 0.0 per cent quarterly, and 1.7 per cent annual, inflation last quarter.

Housing costs were the biggest contributor to the increase. Rents rose 0.6 per cent in the quarter and 2.2 per cent in the year. Construction costs, excluding land, rose 5.4 per cent over the year.

ASB chief economist Nick Tuffley said that although the Reserve Bank would be pleased to see the CPI around its target 2 per cent, it would not put too much weight on the result.

Recent strength in food and fuel prices was unlikely to last, he said. He predicted inflation would fall before it picked up again.

‘‘The Reserve Bank is likely to remain cautious, given the recent weak out-turns in GDP growth around the start of the year,’’ he said.

‘‘The economy needs to be firing on all cylinders if we are going to see evidence of sustained price pressures. Further, there remain a number of downside risks lurking in the background and the composition of the next New Zealand Government is as yet unknown. The Reserve Bank knows this, and with the luxury of time on its side, is unlikely to respond to this result.’’

He did not expect the official cash rate to move until 2019.

At ANZ, economist Philip Borkin said that even though the result was slightly higher than his team had predicted, it was nothing that would force the Reserve Bank to act.

A significant portion of the inflation was due to rising government charges – local authority rates were up 3.5 per cent in the quarter and dwelling insurance rose 12 per cent over the year, on the back of a new fire service levy.

‘‘There’s not really a clear sign that price pressure in the economy is broadening,’’ he said. ‘‘There’s tentative signs but nothing major.’’

There was still a risk that housing market softness could spread, he said.

Infometrics forecaster Mieke Welvaert said house-price inflation seemed to leave less room in household budgets for other spending.

‘‘There has been a lot of downward pressure on prices for furniture, furnishings and floor coverings over the past year, with prices down 2.2 per cent from a year ago.

‘‘I wondered if this has been a result of fewer houses being sold this year, which suggest to me that fewer houses would be renovated.

‘‘But June quarter retail sales numbers show that sales of furniture, floor coverings, houseware, textiles have grown 6.2 per cent since June last year. Which brings me to my next suggestion, that people are having a hard time affording the houses they’re buying and have less cash left over for renovations.’’

Westpac economist Michael Gordon said the Reserve Bank was unlikely to move on the official cash rate until late 2019. ‘‘That reflects our sense that inflation is fairly well-contained.’’