Described as sticky and intractible, economists now think inflation will bite for longer with GDP forecast to contract by 2%, writes Anna Rawhiti-Connell in this excerpt from The Bulletin, The Spinoff’s morning news round-up. To receive The Bulletin in full each weekday, sign up here.
Inflation expected to defy calls for spending restraint
You’ll note I’ve restrained myself from deploying a third “Orr” pun in as many months today. Not Duncan Greive though, who in his preview of what economists are expecting from the consumer price index (CPI) inflation data on Thursday, explains why New Zealand’s price rises continue to defy Orr’s hammer. Worth a click for the image alone. All signs point to the rate landing somewhere between 7% and 7.2% on Thursday. The last CPI update was in January where the rate of 7.2% was seen as an “encouraging sign” by ANZ economists as it was unchanged on the previous quarter. Crucially, the non-tradable inflation rate of 6.6% in January (also unchanged since the September quarter data) was seen as a sign that domestically-generated inflation was slowing. As Greive notes, the concern now is that domestic inflation may prove to be sticky at high levels.
The song we’re singing has changed — we’re not winning
In his column over the weekend, the Herald’s Liam Dann (paywalled) notes that non-retail spending — which includes travel — was up 11.4% in March compared to February and spending on hospitality was up 14.5%. The post-Covid party isn’t stopping. This morning a forecast from ASB economists is tipping New Zealand’s looming recession to be twice as deep as previously thought. ASB is predicting a 2% contraction to gross domestic product (GDP) by early 2024, which is double what the bank last forecast. The bank also forecasts that the country’s expected recession is likely to set in earlier. ASB’s chief economist says high-interest rates and inflation will continue to restrain consumer spending in the coming year, with homeowners feeling the strain and pain the most.
Thirty-year record broken on food prices
Everyone has their own annoying food-price cracked record to spin and mine is currently the price of cauliflower. I last saw it a few weeks ago at $12.95 a head and have not looked again. Yesterday, Stats NZ released the food price index figures for March. Food prices were up 12.1% in the year to March 2023 – which is the highest annual rate of increase seen since 1989. Sadly I was old enough to own Markita’s Toy Soldiers on cassingle when prices were last increasing like this, but not old enough to truly appreciate cauliflower. Fruit and vegetables were up 22.2%, a slight decrease from the 23.1% recorded in February. Vegetables aren’t even the worst of it with Stats NZ spokesperson James Mitchell saying “increasing prices for barn or cage-raised eggs, potato chips, and 6-pack yoghurt were the largest drivers within grocery food.”
Research highlights link between government spending and inflation
As the Herald’s Thomas Coughlan reports, research from Treasury economists has highlighted the effect of government spending and low interest rates on New Zealand’s persistently high rate of inflation. The research does not represent the official view of the Treasury but the economists looked at spending and inflation data and created models to look at which parts of that inflation were driven by demand and which parts were driven by supply. The National party has been trying to argue that the government and the Reserve Bank went too far in stimulating the economy over the course of the pandemic, while the government has consistently pointed overseas to other economies experiencing high inflation. The research suggests the opposition may have a point.