New Zealand's spending power has taken a major hit. Photo / Getty Images
Economists believe that inflation may have reached its peak in this cycle, but that doesn't mean it will automatically return to levels we're comfortable with.
Westpac senior economist Satish Ranchhod tells the Front Page podcast that we should still expect to see high inflation in the coming months.
"We won't be back within the Reserve Bank's target band until the middle of next year at the earliest," he says.
"That means ongoing pressure on our purchasing power."
Inflation hit a 32-year high of 7.3 per cent earlier this week, well off the Reserve Bank's target of between 1-3 per cent.
"They like it to sit close to 2 per cent, but we're still well outside that band. And it's not just down to a few special items like petrol. We're seeing broad-based inflation pressures."
Ranchhod says that most Kiwi families will be feeling the impact of inflation in three big ways.
"First is when they go to fill up the car, it's going to be costing a lot more, second when they get their groceries, they're more expensive. Third, for those of us who are renters, we're seeing big increases on that front."
"Food, fuel and housing: that's a pretty powerful combination. I think nearly every New Zealand family is going to be feeling that."
Wages have risen over the past year, but this hasn't been enough to offset the inflationary pressure.
"For the past year, we've seen those increases in prices outpacing the increase in earnings. That basically means purchasing power is going backwards for a lot of families.
"But there is a bit of a skew across the economy. Those on higher incomes are in a better position to protect their earnings. Those at the lower end of the earning spectrum will really be feeling the pinch right now."
The ongoing impact of inflation has all but confirmed that this isn't just a transitory issue that will quickly disappear.
"Transitory price increases occur when you have something like poor weather that leads to high food prices for a while, but then they come back down," the economist explains.
"What we're seeing in New Zealand is sustained pressure on prices and that coming from a lot of factors. Some of them are imported but we're also seeing pressure domestically."
Ranchhod says that many workers will now be asking their bosses for wage increases, but this could also carry some unintended consequences.
"The irony is if everybody does that, we begin to see the costs of production rising due to the increase in labour costs, and that can then result in inflation remaining high, even longer. And that's a big problem for any economy.
"If you see that sort of wage-price, spiral behaviour becoming embedded, it can erode our productivity."
The risk of inflation becoming embedded in the economy has contributed to the Reserve Bank hiking the Official Cash Rate to ease the demand – and Ranchhod says that we'll see more of this in the coming months.
"We think the Reserve Bank is going to take the official cash rate from 2.5 per cent up to 3.5 per cent by the end of this year," he says.
"And if we don't see signs that inflation is easing off, they could take it even further. Right now, we think they've actually got scope to keep raising rates. With the unemployment rate at a record low, that's giving us a bit of a buffer to the slow economy and keep things ticking."
The good news is that the global economy is starting to show signs of cooling off. Dropping demand has meant that supply chains are improving and there have been some recent drops in oil prices.
The coming months will determine how much of an impact those global shifts have on prices in the local market.
• The Front Page is a daily news podcast from the New Zealand Herald, available to listen to every weekday from 5am.
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