19 Oct 2010

Key welcomes latest economic data

10:23 pm on 19 October 2010

Prime Minister John Key says the latest inflation data shows people are better off under the current Government.

The annual rate of inflation has fallen to its lowest in six-and-a-half years, even though the biggest quarterly rise in more than two years was recorded in the three months to 30 September.

Official figures show the Consumers Price Index rose 1.1% in the latest quarter, taking the annual rate of inflation to 1.5%.

Mr Key says when Labour left office the economy was in recession, inflation was 5.1% and real, after tax, wages were falling.

Labour's finance spokesperson David Cunliffe says, however, that the Government is feeling the heat over the economy, with growth falling and unemployment still high.

He says with inflation of 1.1% in the last quarter alone, and the GST increase to come in the next quarterly data, inflation is set to rise sharply.

ANZ Bank's senior economist Khoon Goh says the recent rise in GST will cause a ripple in fourth quarter inflation, but warns against acting on the temporary increase.

Mr Goh predicts a fourth quarter increase of 2.5%, taking annual inflation to 4.5%.

He says the Reserve Bank will regard this as a one-off price effect, and it will not want to see people act on high temporary inflation when they seek to bargain for wages or price goods and services.

Westpac economist Dominick Stephens also expects annual inflation to hit 4.5% by the middle of next year, thanks to the GST rise, higher global food prices and rate rises.

He told Morning Report it is unrealistic to think that this will not be a factor in wage negotiations. Inflation expectations will rise, he says, and the Reserve Bank may have to respond.

Meanwhile, a budgeting advisor says low inflation has not been much help to people on low incomes, because food and rent have risen faster than wages.

Federation of Family Budgeting Services chief executive Raewyn Fox says people on low incomes have to spend most of their money on food, rent and power, which have all risen by much more than incomes.

She says budget services are bracing themselves for an influx of new clients in the wake of the GST increase.