Prices increased by higher-than-forecast 0.8 percent in first quarter, because of rising transport and supply chain costs.
International airfares increased by 10 percent in the March quarter, hiking up the consumer price index.
Airfares were 22.8 percent up on the same time in 2019, the months before the Covid border closures. Domestic airfares fell nearly 2 percent compared to December 2020, but increased by 5 percent compared to the first three months of 2019.
Westpac senior economist Satish Ranchhod said airfares typically fall this time of year after summer, but disrupted travel plans and reduced capacity due to the pandemic had driven up prices.
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Overall, the quarterly consumer price index is still below the Reserve Bank’s forecast of a 1 percent rise.
But in annual terms inflation rose 1.5 percent, inching closer to the 2 percent midpoint in the Reserve Bank’s target inflation range.
Other contributing factors to the increase in consumer prices were higher oil prices, supply chain disruptions and increased labour costs due to lack of migrant workers.
Transport prices were up 3.9 per cent from December 2020 due to the higher fuel prices, but also because second hand cars were more expensive, due to Covid-19 restricting car manufacturing overseas and imports.
Kiwibank chief economist Jarrod Kerr said fuel prices had moved around and the increase was likely a bounce-back from low prices last year. “There won’t be a huge upward pressure on fuel prices from here as the global outlook gets stronger,” Kerr said.
Most banks expect supply chain disruptions will be an ongoing issue, though, and will push the consumer price index still higher around the middle of the year.
ANZ, ASB and Kiwibank expect inflation to break above 2 percent by mid-2021, while Westpac forecasts a rise to about 2.5 percent.
“We’re going to see people purchasing fewer goods and start seeing them go out to the pub more than they have. This will ease demand for household and furniture goods and inflation will drop back.”
– Satish Ranchhod, Westpac
Ranchhod said by next year, inflation would likely drop as supply disruptions ease, global production levels ramped up and the world gets vaccinated against the coronavirus.
“As that happens, we’re going to see people purchasing fewer goods and start seeing them go out to the pub more than they have. This will ease demand for household and furniture goods and inflation will drop back,” Ranchhod said.
The other area of strength was the housing market, with a 1 percent increase in rents as the freeze was lifted.
This gain predated the Government’s announcement to remove interest deductibility on investment property. The cost of building a new home rose 1.2 percent.
Most banks agreed the underlying detail of Wednesday’s report poured some cold water on suggestions that a supply-related rise in inflation could force the Reserve Bank to hike the official cash rate above 0.25 percent sooner than planned.