New Zealand started hiking rates earlier than most, and has among the highest central bank interest rates in the OECD. Yet bank economists are picking inflation to stay high.
We won’t get the official data until later in the week, but economists at New Zealand’s major banks are uniformly predicting that inflation will stay stubbornly high when figures are released on Thursday. The big four Australian banks, along with KiwiBank, all predict that the Consumer Price Index (CPI) for the first quarter of 2023 will show an annual increase of somewhere between 7% (WestPac) and 7.2% (ANZ and ASB). If those predictions prove correct, that will be four consecutive quarters (also known in the industry as “a year”) of inflation sitting around 7%, which suggests that the new emphasis on bread-and-butter issues has had no impact on the cost of bread and butter. In fact, the biggest driver of inflation over the past year has been the cost of bread, butter and other foodstuffs.
The banks’ predictions cover the first complete quarter since Reserve Bank governor Adrian Orr made his infamous “cool your jets” speech, attempting to shock New Zealand’s consumers into keeping their Eftpos cards in their wallets. It was the central bank equivalent of a parent admonishing their kids not to party while they go away on holiday, but our bank economists believe the warning went unheeded – that New Zealanders could not keep it (their wallets!) in their pants, and instead kept the post-Covid rager going for another three months.
There is already ample evidence to back this up, and Orr has twice raised interest rates by a chunky 50 basis points (.5%) since his shockingly blunt speech in late November of 2022. It’s two weeks since he last hiked rates, which now sit at 5.25% – well above the Eurozone (3.5%), Australia (3.6%) and the UK (4.25%). New Zealand is currently above even the United States, which has pushed its Federal Reserve rate to 5% – but at least the US has strong evidence that inflation is getting under control, with its consumer prices easing from 6% in the year to February to 5% in the year to March.
No one thinks New Zealand is tracking down to any major degree yet. If these forecasts are correct, then despite an aggressive tightening cycle that has seen rates rise by a cumulative 4.5% in just 18 months, New Zealand’s inflation remains more or less impervious to its central bank’s efforts – which is why economists from ANZ and KiwiBank are still predicting one more rate rise will follow in May. Below I’ll run through three major factors the chief economists at our banks cite as reasons why New Zealand seems no closer to getting inflation back into its 1-3% target band.
The grocery bill is too damn high
“With Cyclone Gabrielle devastating areas dubbed the ‘fruit bowl of NZ’,” wrote KiwiBank’s economists, “it’s no surprise to see a chunky double digit increase in fruit and vegetable prices.” Stats NZ released its Food Price Index data for the March quarter yesterday, revealing a brutal 12.1% increase in food prices year-on-year. Categories were up across the board, led by an eye-watering rise in fresh fruit and vegetable prices. None of it looks good:
- Fruit and vegetables prices increased 22.2%
- Meat, poultry and fish prices increased 7.8%
- Grocery food prices increased 13.7%
- Non-alcoholic beverage prices increased 8.2%
- Restaurant meals and ready-to-eat food prices increased 8.7%
ANZ put this down to a hard-to-solve cocktail of “extreme weather events, rising input costs, geopolitical tensions and ongoing labour shortages”, and doesn’t see it easing any time soon. (Worth noting that inflation also impacts the sky-rocketing cost of cigarettes, which have excise tax indexed to the CPI – hence a savage 7.2% annual increase in the price of darts).
The rent is, too
Cyclone Gabrielle destroyed homes across the North Island, further squeezing an already highly constrained market for housing. This helped drive the flow measure of rents (prices for new tenancies) up by 1.5% in March – the fifth-highest monthly increase since the start of the pandemic, 36 months ago. KiwiBank suggests that “the repair of damaged infrastructure will see the construction pipeline swell in the coming months. And shortages still plaguing the sector, particularly around labour, will likely be exacerbated by the rebuild.” Which is to say that despite signals they might have begun declining late last year, post-Gabrielle, construction costs, rents and even house prices are all likely to hold steady, if not start marching up again.
The worst thing is, we’re doing it to ourselves
Perhaps the most troubling part of all this is where inflation is coming from. When it first kicked in, during 2021, there was a wonkish ongoing debate between “team transitory” and “team permanent”. Team transitory argued that inflation was caused by a set of one-off Covid-related factors, to do with border controls and supply chain issues. Once those passed through, they believed inflation would quickly return to its normal low range. Team permanent thought inflation was going to stick around a lot longer.
There are few members on team transitory now, as New Zealand is now starting to display homegrown inflation – the kind of NZ-made product we’d much rather avoid. The distinction here is between “tradable” and “non-tradable” inflation. Tradable inflation is largely beyond our control – mostly fuel and commodity prices, and it is coming down, albeit slowly. Non-tradable inflation, though, is what we can theoretically control. It’s what Orr is trying to impact with his central bank interest rates – but is steadily rising.
As ANZ notes, high interest rates have not impacted the cost of what we sell to each other, and it is concerned that “there is a real risk that domestic inflation proves sticky at high levels, potentially necessitating another round of rate hikes after the Reserve Bank has held the OCR at its ‘watch, worry and wait’ level for a few quarters”. That WWW level is 5.5%, which we’re almost at already, and has been signalled as the upper bound of interest rates. Yet if making mortgages and other lending ruinously expensive still doesn’t get inflation under control, we might get another, even sterner talking to from Wellington’s scary finance dad, with even higher interest rates. All of which is to say that we have a very tense Thursday coming up, and seem a long way from being through the cost of living crisis.