Economists are still picking that the Reserve Bank will slash interest rates to 6.5 percent from 7.5 percent on Thursday despite new figures today confirming New Zealand’s highest rate of inflation for 18 years.

The Consumers Price Index surged 1.5 percent in the September quarter, bringing the rate of annual inflation to 5.1 percent. That is the highest since June 1990 when the figures were affected by an increase in goods and services tax.

However, the high rate of inflation has been anticipated. Soaring fuel costs and rising food prices have been the main causes, with power prices and local government charges chipping in.

Today’s figures are expected to be the peak of the rise in inflation. Price rises are now expected to moderate as the price of oil recedes and reduced household spending puts downward pressure on businesses’ profit margins.

And even though there were some startling price rises in the latest figures, other figures showed that the impact of the New Zealand’s economic slowdown is really biting.

Prices in the hard-hit second-hand car market sagged by a massive 8 percent in the September quarter. The strain for retailers was also evident, with prices of clothing and footwear dropping 0.4 percent.

Economists say the RBNZ, which aims to keep inflation between 1 per cent and 3 percent, is prepared to let higher prices take a backseat at the moment to the widespread concerns about the faltering economy.

The New Zealand economy is already in recession, which is technically defined as two consecutive quarters of a shrinking economy. Two weeks ago the NZ Institute of Economic Research’s latest business opinion survey suggested that the recession may continue into the December quarter, meaning we will have had four consecutive quarters of contraction.

There is now a growing school of thought that the economy may dip in and out of recession for the whole of next year as well, before starting to recover again.

UBS New Zealand senior economist Robin Clements said the latest inflation figures were “old news”. Several items - most significantly petrol and vegetable prices - were set to drop sharply, while further out falling commodity prices would have an impact. This meant that inflation would drop considerably in coming months.

“Bottom-line, the inflation outlook is considerably improved and the RBNZ should have far greater confidence in the prospect for inflation to come back within the [1 percent to 3 percent] target band over an acceptable timeframe, whilst accommodating further easing and a lower exchange rate.

“In part reflecting this outlook and the effects of the credit crisis on funding costs, we expect the RBNZ to cut the Official Cash Rate by 100 basis points to 6.5 percent on October 23.”

Just over a quarter of the annual rise in inflation was due to soaring fuel prices - up some 29.3 percent in the past year. A 9.5 per cent rise in food prices was the other main contributor.

In the September quarter alone food prices increased 3.7 percent and were the most significant factor in the 1.5 percent overall inflation climb. Vegetable prices shot up by 20 percent, mainly because of wet weather.

Also in the September quarter, housing and household utilities prices rose 1.4 percent - driven by higher prices for local authority rates and payments. Transport prices rose 2 percent - mainly due to rising petrol prices.

Nine of the 11 industry groups covered by the CPI showed increases during the September quarter.

Other notable price movements in the quarter included an extraordinary 94.9 percent increase in the price of lettuce, while overseas package holidays surged 13.2 percent in price.

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