New Zealand Inflation Accelerates to 18-Year-High

By Tracy Withers

July 15 (Bloomberg) -- New Zealand's consumer prices rose at the fastest pace in 18 years in the second quarter, fanned by fuel and food costs, adding to signs the economy is facing stagflation as it slips into recession.

The consumer prices index rose 1.6 percent from the first quarter, Statistics New Zealand said in Wellington today. The median estimate of 12 economists surveyed by Bloomberg was for 1.4 percent. From a year earlier, prices rose 4 percent.

Rising prices are combining with record-high interest rates, a drought and a slumping housing market to stall New Zealand's $104 billion economy. Reserve Bank Governor Alan Bollard said last month he couldn't rule out the possibility of a recession as household spending slows and companies invest less.

``It's certainly stagflation in the sense that the economy isn't growing and it's got an inflation problem,'' said Matthew Johnson, an economist at ICAP Australia Ltd. in Sydney. ``It's a tough situation for the central bank to be in. If they cut in the face of accelerating inflation, they are risking a policy error, which could be very expensive in the long run.''

New Zealand's dollar bought 76.28 U.S. cents at 11:25 a.m. in Wellington trading from 76.40 cents immediately before the report. The chance of a rate cut at the next review on July 24 fell to 52 percent from 58 percent, according to an index calculated by Credit Suisse based on swaps trading.

Recession Risk

Bollard said on June 5 that slowing growth will return inflation below the 3 percent limit of his target range by mid- 2010 and it is likely he will cut the benchmark interest rate from 8.25 percent this year.

Three of 13 economists surveyed by Bloomberg expect a rate reduction on July 24. Ten expect a cut in September.

The economy contracted 0.3 percent in the first quarter. Eight of 13 economists surveyed by Bloomberg say it also shrank in the second quarter, putting the economy in its first recession since 1998.

A net 23 percent of companies say sales will slow in the next three months, the most pessimistic outlook since 1990, suggesting the economy will also contract in the third quarter, according to a July 8 report from the New Zealand Institute of Economic Research.

Bollard expects annual inflation will accelerate to 4.7 percent in the year ending September, the highest since 1990, as fuel and food costs rise.

Retail Sales

Bollard is under pressure from companies and home-owners to cut interest rates as drought, international credit turmoil and a slump in the housing market weigh on consumer spending.

Hallenstein Glasson Holdings Ltd. said last week that full- year profit will fall at least 28 percent as sales drop, the third retailer to cut earnings forecasts in the past two weeks.

Retail spending in May had the biggest slump in four years, Statistics New Zealand said yesterday. House sales fell for a fourth month in June, dropping to a 16-year low.

Bollard's primary focus is on non-tradable inflation, a core measure of prices that are not influenced by currency fluctuations and fuel, say economists.

Non-tradable prices rose 0.9 percent from the first quarter when they increased 1.1 percent. The result matched economists' forecasts. Prices gained 3.4 percent from a year earlier, the slowest annual pace since early 2003.

Fuel and food prices, plus the cost of owning a home, made the biggest contributions to second-quarter inflation.

Gasoline Prices

Gasoline prices rose 13 percent in the quarter and 26 percent from a year earlier. Excluding gasoline, consumer prices gained 1 percent in the quarter and 2.7 percent over the year, the agency said. Diesel prices jumped 29 percent.

Fanned by jet fuel costs, domestic airfares rose 3.9 percent and international fares also increased.

Food prices rose 2.2 percent led by bread, snack foods, fish and vegetables.

A 3.6 percent increase in electricity prices led to an increase in the cost of owning a home. Rentals rose 0.7 percent. The cost of buying and building a new house gained 1.1 percent.

The price of new cars, computers and overseas holidays declined as a rising currency curbed the cost of imports.

Air New Zealand Ltd., the nation's biggest airline, raised fares by an average 10 percent between March and June, citing record-high jet fuel prices.

Electricity prices have increased as a drought depleted the levels of lakes and rivers that account for 60 percent of the nation's generation.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.