1531711236056 - Petrol spike to send inflation higher, but end to low interest rates unlikely

Petrol spike to send inflation higher, but end to low interest rates unlikely

Higher oil prices and a weaker New Zealand dollar are expected to see inflation hit 2 per cent later this year, although the increase may be fleeting.

On Tuesday, Statistics New Zealand will publish the consumer price index (CPI) – the common measure of household inflation – for the three months to June 30. It is expected to increase to around 1.6 per cent in the June quarter, boosted by record petrol prices.

Several economists see it reaching 2 per cent before the end of the year – the unofficial target for the Reserve Bank – but even now there was warnings that it may fall again.

In May, regular petrol prices hit an all time high of $2.299 a litre in many parts of the country, driven by a rising global oil price and a weaker New Zealand dollar.

READ MORE: Inflation jumps above 2 per cent as petrol prices and tobacco tax rise

Petrol prices have dropped around 3 per cent since, but the Auckland regional fuel tax, which came into force on July 1, and looming nationwide excise increases on fuel, mean petrol could continue to boost inflation throughout 2018.

“The near-term inflation outlook has firmed markedly as a result of higher oil prices, the recent fall in the New Zealand dollar and incoming petrol taxes,” ASB economist Kim Mundy said, predicting inflation would hit 2 per cent this year.

If inflation was to hit 2 per cent, it would have significance for the Reserve Bank, which is tasked with keeping inflation as close as possible to the middle of a 1-3 per cent band. Despite the target, annual inflation has been below 2 per cent for all but one quarter since 2012.

All else being equal, inflation rising to 2 per cent could force the central bank to review whether interest rates were set so low as to risk stoking higher inflation. 

However in recent months, risks to the economy have spread, which could take pressure off inflation.

Fears of a global trade war have grown globally, while in New Zealand business confidence has plunged.

Westpac also sees inflation hitting the 2 per cent mark this year, but warned it is unlikely to last. The bank forecasts inflation will hit 2.1 per cent in December, but will fall back to 1.4 per cent by the end of 2019.

“We don’t think that the rise in inflation this year will necessarily be sustained,” Westpac chief economist Dominick Stephens said.

“Maintaining inflation around 2 per cent next year would require a further surge in world oil prices and/or a continued slide in the exchange rate.”

One major bank believes inflation barely rose at all in the June quarter. Economists at ANZ have forecast only an 0.1 per cent increase in the June quarter, taking annual inflation to 1.2 per cent, well below the market average.

ANZ economist Miles Workman said the risk that inflation “remains sluggish for longer” is increasing, and if the risks materialised “an [official cash rate] cut could eventuate quite rapidly, although we are not there yet.”

Economist Shamubeel Eaqub said there had been a series of false starts since the global financial crisis, in which the market predicted inflation would increase, but it failed to do so.

“I don’t believe the hype around inflation until I see the whites of the eyes, because the reality is we’ve been disappointed for the last 10 years on inflation,” Eaqub said, adding that the central bank could afford to wait until it was clear that inflation was building before acting.

“There’s absolutely no way the Reserve Bank will or should be preemptive on inflation. They should wait to see it actually happening and they should let inflation take place because they’ve been failing to generate enough inflation in the economy.”