New Zealand’s most recent inflation data defied widespread predictions that it would fall on Tuesday as it barely broke from a 30-year high, sparking alarm among economists and raising new questions about the effectiveness of rate hikes.
Prices rose 2.2% in the last quarter, bringing annual inflation to 7.2%, just below the 7.3% recorded at the end of June.
The Reserve Bank had forecast inflation to fall to 6.4% in the last quarter, while economists at major banks expected it to fall to somewhere between 6.5% and 6.9%.
The main drivers of inflation were food, housing and household supplies and transportation. The cost of vegetables reached its highest level in 23 years. The data showed that domestic (non-tradable) inflation had risen, while imported (tradable) inflation had begun to decline.
The Treasury Secretary, Grant Robertson, blamed the persistently high numbers on a volatile international environment and said the government would “continue to carefully target spending”, while the National party criticized the numbers as “a mockery of Labour’s claims”. on a strong economy”.
Kiwibank senior economist Jarrod Kerr said the gap between forecasts and Tuesday’s actual figure was “alarming”.
“The report was a shock, to put it politely,” Kerr said, adding that both global and domestic inflation were much stronger than expected. Economists had predicted that transportation costs would dampen inflation as a result of falling gasoline prices, but an unexpected 20% increase in international air fares offset that.
New Zealand’s central bank was one of the first in the world to target inflation and price stability with rate hikes, Kerr said, adding that they were “far from it right now.”
“Their failure on their mandate will only reinforce their determination to do more – it’s pretty clear they need to walk [interest rates] more and in larger quantities,” Kerr said. “Today’s report will be like a red rag to an inflation-fighting bull.”
Kiwi Bank predicted that the Reserve Bank would make an “excessive hike” of 75 basis points (instead of 50 bp) to official spot interest rates in November, with an eventual rise to 5% in 2023. That would put more pressure on households, said Kerr.
“The person on the street is having a hard time right now and it’s a very uncomfortable view for the household right now. Most people are now dealing with much higher interest rates… higher inflation and in many parts of the world, including New Zealand, we have a declining housing market.”
The effectiveness of rate hikes to lower inflation in the current global context is being questioned in countries like the US, which also record persistently high prices and target aggressive rate hikes. Some economists argue that this comes at the cost of dealing with other inflationary culprits, such as corporate prices, rising energy costs and supply chain disruptions.
Edward Miller, a researcher and policy analyst at First Union, warned that raising interest rates would only put further pressure on consumers while doing little to curb inflation.
“If inflation is being driven by petroleum, fertilizer prices and food prices from Russian warfare, then there isn’t much raising domestic interest rates can do,” Miller said, adding that these internationally driven price increases are transitory.
“By raising interest rates, they incur additional costs for New Zealand companies, which itself drives up prices; in fact, they prolong the problem.”
Miller cited the cost of vegetables as an example. While it’s too early to say what caused the latest spike in vegetable prices — one of the biggest inflation drivers this quarter — last quarter’s business price index showed the biggest increases in horticultural spending were gasoline and fertilizer, followed by rising interest rates.
“All of this should underline the Reserve Bank that for the most part we are not dealing with a demand-driven inflationary situation, but rather a supply-side shock from a combination of the Russian invasion of Ukraine and post-Covid supply chain shocks. .”