New Zealand’s latest inflation data defied widespread forecasts that it would fall on Tuesday as it barely budged from a 30-year high, prompting alarm among economists and raising fresh questions about the effectiveness of interest rate hikes.
Prices rose 2.2% in the latest quarter, bringing year-on-year 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 final quarter, while economists at major banks expected it to fall somewhere between 6.5% and 6.9%.
The main drivers of inflation were food, housing and household services and transport. Vegetable costs hit 23-year high. The data showed that domestic (non-tradable) inflation rose while imported (tradable) inflation began to decline.
Finance Minister Grant Robertson blamed the persistently high figures on an unstable international environment and said the government would “continue to carefully target spending”, while the National Party criticized the figures as “making a mockery of Labour’s claims of a strong economy”. .
Kiwibank chief economist Jarrod Kerr said the difference between the forecast and Tuesday’s actual figure was “alarming”.
“The news was shocking, to put it mildly,” Kerr said, adding that both global and domestic inflation were much stronger than expected. Economists had predicted that transport costs would depress inflation due to falling petrol prices, but an unexpected 20% rise in international airfares thwarted that.
New Zealand’s central bank was one of the first in the world to target inflation and price stability by raising interest rates, Kerr said, adding that “they are a long way from that at the moment”.
“Their failure in their mandate will only strengthen their determination to do more – it’s pretty clear they have to step up [interest rates] more and more amounts,” Kerr said. “Today’s news will be like a red rag to the inflation-fighting bull.”
Kiwibank predicted the Reserve Bank would “raise” the official cash rate by 75 basis points (rather than 50bp) in November, with a possible rise to 5% in 2023. That would put further pressure on households, Kerr said.
“The man on the street is doing it hard at the moment and it’s a very unpleasant sight for the household at the moment. Most people now face much higher interest rates … higher inflation and we have a declining housing market in many parts of the world, including New Zealand.”
The effectiveness of interest rate hikes in reducing inflation in the current global context is questioned in countries such as the US, which are also experiencing persistently high prices and are targeting aggressive rate hikes. Some economists argue that this comes at the expense of addressing other inflationary culprits such as corporate pricing, 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 more pressure on consumers while doing little to reduce inflation.
“If inflation is driven by oil, fertilizer prices and food prices from the Russian war, then there’s not much that raising domestic interest rates can do,” Miller said, adding that these internationally driven price increases are temporary.
“Rising interest rates puts additional costs on New Zealand businesses, which in itself increases prices; in fact, they are prolonging the problem.”
Miller pointed to the price of vegetables as an example. While it is too early to say what caused the latest spike in vegetable prices – one of the biggest drivers of inflation this quarter – business price index data last quarter showed the biggest increases in gardening costs were petrol and fertilisers, followed by rising interest rates. .
“All of this should underscore to the Reserve Bank that we are mostly not dealing with a demand-driven inflation situation, but rather a supply-side shock from a combination of the Russian invasion of Ukraine and post-Covid supply chain shocks. .”
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