US President Joe Biden says American shoppers and households are getting "squeezed by the cost of living" as consumer price inflation rose again in the world's biggest economy, but in NZ, there are signs New Zealand is finally “winning the war” on inflation. Photo / 123RF
New Zealand is finally “winning the war” on inflation, Kiwibank chief economist Jarrod Kerr says.
Consumer Price Index inflation for the September quarter landed well below market expectations.
The annual rate of inflation fell from 6 per cent to 5.6 per cent on a rise of 1.8 per cent forthe quarter.
“Inflation has eased from a peak of 7.3 per cent last year, to 5.6 per cent today,” Kerr said. “That’s a big psychological shift. Employers and employees, price makers and price takers, are adjusting from inflation running in the sevens, to six, to now in the fives. And we expect inflation to be in the fours come year-end. Price-setting, especially wage-setting, will be moderated in response. We’re heading in the right direction. And negotiations should become less heated.”
The Reserve Bank had forecast it to stay at 6 per cent. Other economists had forecast a rise to 6.1 per cent, based largely on higher fuel costs through the third quarter.
Global oil prices spiked sharply in August and September as Opec cut supply. The Government petrol tax break was also removed from July 1.
“Favourable base effects are in play with last year’s spike in energy and food prices falling out of annual calculations,” Kerr said. “Cooling commodity prices will also help to lower the cost of imports. And a stalling post-Covid recovery in China will also weigh on imported inflation.”
Inflation in China was currently at zero, having fallen from 2.8 per cent last year.
“So we’re unlikely to import a lot of inflation from our largest trading partner,” Kerr said.
The tricky bit would be getting back to the RBNZ’s 2 per cent target, a task that hinged on the projected path for domestic inflation - the stickier, demand-driven kind, he said.
“And a task made difficult by the ongoing strength in wage growth.”
“We expect the RBNZ to sit tight for the remainder of the year. The RBNZ signalled 5.5 per cent as the peak in the cash rate, with a ‘very, very high bar' for further increases. We expect no more,” Kerr said.
Economic data had been weakening and the data to come would also be weak, he said.
“Signs of an imminent slowdown in economic growth are already surfacing. Firms are pessimistic about future trading activity and households are pulling back on discretionary spending.”
The RBNZ would take comfort in the CPI report, confirming inflation is on the way down.
“Monetary policy operates with long lags, and we’re yet to see the full impact of past actions on today’s economy,” Kerr said. “There’s no need to tighten further.”
The quarterly inflation figure of 1.8 per cent would be frustrating for households, he said.
“But it could have been much worse. Oil prices have spiked, and that’s ‘fuelling’ transport costs. The fluctuation in oil prices came at the same time the Government reintroduced excise taxes.”
It was a large spike, he said.
“It’s important to note that the spike in oil, and therefore petrol prices, acts like a tax on consumers. When prices of essentials jump, spending on non-essential items falls. Consumers are forced to adjust.”
Consumers had been hit hard by surging inflation, especially on essential items, and an aggressive lift in interest rates, Kerr said.
“Within the CPI report, we saw prices on household contents falling. Because demand has fallen. We are winning the war on inflation!”
Other economists were more cautious but there is now a market consensus the OCR will be on hold for at least the rest of 2023.
“Monetary policy is set with inflation roughly 18 months ahead in mind. With inflation behaving at least as well as the RBNZ has forecast it should see no reason to raise rates further,” BNZ head of research Stephen Toplis said.
“And don’t forget that the 25 basis point increase back in May already had some insurance built into it, and the Reserve Bank has been basing its recent statements on the assumption that there was some near-term upside risk to its inflation outcomes. The bank will not yet be in any greater hurry to lower rates but it will certainly be feeling very relaxed that its game plan is working.”
Wholesale interest rates fell.
Market pricing for a rate hike in November dropped from around 34 per cent to 10 per cent and the chance of any further rate hike dropped from around 84 per cent to 40 per cent, Toplis noted.
BNZ now had a first rate cut priced in for February 2025, a few months earlier than previously.
ANZ and Westpac economists pushed back their forecasts for a November rate hike, to February. They remain the most hawkish of the major bank economists
“The details of today’s data support our view that domestic-driven inflation pressures remain a significant problem. However, clear progress was evident, and that takes pressure off the RBNZ to move the OCR any time soon,” ANZ economist Henry Russell said.