This will really concern the Reserve Bank, given it is domestic price pressures that it can influence. It’ll also make it difficult for the Government to lean so heavily on the war in Ukraine and supply chain problems when quizzed on the “cost of living crisis”.
While overseas factors like high oil prices and shipping costs were key drivers of inflation in the September quarter, high labour, food, and construction costs are expected to underpin the December quarter reading.
Indeed, economists see non-tradeable (domestic) inflation coming in stronger than tradeable (imported) inflation.
ASB economists – who are outliers among their peers for forecasting worsening inflation – believe annual inflation would likely have been close to 8 per cent, had oil prices not fallen by 11 per cent between the September and December quarters.
They see capacity constraints pushing construction and property maintenance costs up, and higher interest rates prompting landlords to lift rents.
Meanwhile bad weather, high input costs, geopolitical tensions and labour shortages saw food prices rise by 1.8 per cent in the three months to December.
Rising interest rates around the world are expected to eat into people’s disposable incomes and cause economic growth to slow. This is expected to dampen inflation.
In New Zealand, business confidence sank to a record low in the December quarter, with a net 13 per cent of businesses surveyed by the New Zealand Institute of Economic Research (NZIER) reporting declining activity towards the end of 2022, and a net 33 per cent expecting declining activity in the first quarter of this year.
Nonetheless, because businesses surveyed also said they intended to keep lifting prices to keep up with rising costs, and reported continuous struggles getting staff, some economists aren’t convinced the economic slowdown will stop the price rises.
Indeed, BNZ economists say the situation is “starting to look like stagflation on steroids”.
Meanwhile ANZ economists say the Reserve Bank is between a “rock and a hard place, with activity measures looking sickly, but no evidence emerging yet that that weakness has translated into lower inflation pressures.
“Of course, this was always going to happen to some extent, given the dynamics of how monetary policy affects the economy – first confidence, then activity, then finally inflation.
“But the X factor this time is that the Reserve Bank feels a sense of urgency to get inflation down to more acceptable levels before it becomes normalised.
“It will only have the luxury of ‘watching, worrying and waiting’ once there is a fair degree of certainty that wage-price spiral risks have been quashed and inflation expectations are receding.”
Similarly, ASB economists maintain, “Downside risks to the inflation outlook look to be accumulating.
“However, the starting point for inflation is way too high and the risk of a pronounced overshoot of the inflation target means that the Reserve Bank does not have the luxury of sitting on its hands.”
Accordingly, ASB, ANZ, BNZ and Westpac economists believe the Reserve Bank will lift the OCR by another 75 points, to 5 per cent, at its next review on February 22.
Meanwhile, Kiwibank economists believe it will opt for a 50-point lift.
Kiwibank economists believe labour market conditions should loosen in the second half of this year, with the unemployment rate steadily rising.
“Wage growth will naturally lose steam. We expect non-tradables inflation will peak around current levels of 6.5 per cent, but a sticky descent follows,” they say.
“We believe the Reserve Bank has gained enough traction with their rate hikes to date, and a terminal cash rate of 5 per cent (or lower) is all that is required to meet the Reserve Bank’s mandates.
“We continue to highlight that a move to 5.5 per cent is likely to be a step or two too far. Mortgage rates have nearly tripled. And both the NZIER business survey and Real Estate Institute of New Zealand housing statistics give cause for caution.”
