GST and fuel have us pumped up - Stuff.co.nz

ROELAND VAN DEN BERGH - BusinessDay.co.nz

The sharp rise in the cost of petrol and the increase in GST will cause inflation to spike to at least 4 per cent for the year to December, economists say.

Petrol prices have shot up by more than 6 per cent and the Government also increased the rate of GST to 15 per cent from 12.5 per cent in October.

Westpac economists expect inflation of 2.3 per cent for the December quarter when the latest consumer price index is released on Thursday, taking that annual rate to 4 per cent, in line with the Reserve Bank's expectations last month.

That compares with a seven-year low of 1.5 per cent in the September quarter.

Petrol prices have been "sprinting ahead", rising 6.4 per cent in the December quarter due to a mix of higher international prices, GST, the introduction of the emissions trading scheme and levies, adding 0.35 per cent to inflation.

However, the Reserve Bank would largely ignore the fuel impact because higher petrol prices also drained consumer purchasing power of other goods, which lowered inflationary pressures in other parts of the economy.

ASB Bank economists said the uncertainty around how much of the GST increase was being passed through to consumers by business meant there was more uncertainty over the December forecast than usual.

While some business had decided to absorb the GST increase, others had taken the opportunity to round up prices above the rate increase.

ASB expected the higher fuel costs to push inflation for the quarter to 2.6 per cent taking the annual inflation figure to 4.3 per cent.

The Reserve Bank was likely to have adjusted its December quarter inflation forecast slightly given petrol prices had risen by just over 10c a litre since its last forecast in December, ASB economists said.

Food would be a minor contributor to inflation for the quarter with fruit and vegetable prices falling hard in November as production recovered from earlier storms.

Housing rents had picked up, boosted by demand following the Canterbury earthquake.

Prices for electronics and durables were being kept in check due to the stronger currency and reluctant consumers.

ASB expected inflation to peak at 5.3 per cent by June, slightly above the Reserve Bank's forecast of 5 per cent.

Businesses were increasingly finding it harder to find skilled workers, suggesting growth in wages would begin to recover during the year.

The Reserve Bank has indicated it would keep a close eye on medium-term inflation expectations, pricing intentions and wage data for any signs of a pick-up in underlying inflation.

The bank has a target of keeping inflation between 1 per cent and 3 per cent, but is able to look through the effects of one-off Government policy changes like the increase in GST.

"We expect the Reserve Bank will become less comfortable with the inflation picture over the coming year," ASB said.

Sponsored links