The Reserve Bank should start to lift the official cash rate (OCR) this month, after higher than expected inflation figures, ANZ says.
Inflation hit 1.6 per cent in the 2013 year, with an unexpected surprise 0.1 per cent lift in the December quarter, when economists had picked prices to drop.
It was the highest annual increase in inflation since early 2012.
ANZ economists are now calling a January OCR hike because of the higher than expected inflation figures.
"We think the Official Cash Rate needs to move sooner as opposed to later and are now actively calling a hike in January," ANZ senior economist Mark Smith said. Both inflation and economic growth had surprised, compared with earlier Reserve Bank forecasts.
Westpac Bank economists said the "big data surprise" raised a legitimate question of whether the Reserve Bank might raise interest rates this month.
The next Reserve Bank announcement on the OCR is due on January 30. Before today's inflation announcement most economists had been expecting the first rate rise - from its historic low of 2.5 per cent - to be in March, with no "smoking gun" yet.
Bank economists had expected a small decline in the December quarter, with the annual increase about 1.5 per cent. The Reserve Bank last month forecast the CPI to fall 0.2 per cent in the December quarter.
But this morning's data showed higher international air fares and rising housing and dairy prices, including milk and cheese, were only partly countered by lower vegetable prices and cheaper petrol.
Westpac chief economist Dominick Stephens said most of the surprise in the inflation figures was due to higher airfares, household items and recreational goods, suggesting the effect of a high New Zealand dollar was not being passed through.
But of more concern was housing-related inflation.
Construction costs, "purchase of new housing", rose 1.1 per cent in the quarter and is now up 4.7 per cent in the year. The rising building costs are affecting the whole country, not just Canterbury.
"This is something we have been warning of ever since the Canterbury earthquakes struck," Stephens said.
The Canterbury quake rebuild had been expected to strain the economy's resources and create inflation pressures, forcing the Reserve Bank into a "substantial OCR hiking cycle".
"That view now looks to be coming into fruition," Stephens said.
Statistics NZ said international airfares rose 12 per cent in the December 2013 quarter - the highest quarterly rise since the December 2009 quarter.
"International airfares usually rise in December quarters," Statistics NZ prices manager Chris Pike said.
"This quarter's rise reflects seasonally higher airfares to Asia and Europe."
Package holiday prices (up 7.3 per cent) also showed a seasonal rise.
Prices for housing and household utilities were up 0.5 per cent because of higher prices for property maintenance, purchase of newly built houses, and rentals for housing.
Prices for milk, cheese, and eggs rose 4.2 per cent, the highest quarterly rise since the September 2010 quarter.
Vegetable prices (down 20 per cent) fell in the December quarter, as they usually do. Prices for tomatoes, lettuce, and cucumber were about half what they had been in the previous quarter.
Petrol prices fell 3.5 per cent in the December quarter after a 5.6 per cent rise in the September quarter, when they peaked at their highest level - an average of $2.17 a litre for 91 octane.
The average price in the December quarter was $2.09 a litre. Petrol is now about $2.15 a litre.
Inflation typically falls in the last three months of the year due seasonal price reduction in particular for fruit and vegetables. The Food Price Index fell 1.4 per cent in the December quarter.
- Fairfax Media