Our current economic situation is far from ideal. But today's better than expected inflation data shows there is reason to be optimistic. Photo / Getty Images
Our current economic situation is far from ideal. But today's better than expected inflation data shows there is reason to be optimistic. Photo / Getty Images
OPINION:
At 6.7 per cent, our annual inflation is still too high.
The lower-than-expected number today doesn’t change the equations for the Government and Reserve Bank as they look to rebalance the economy.
But it does offer some light at the end of the tunnel with regard tothe cost of living crisis and soaring mortgage rates.
It goes to the confidence with which we can look through the impending downturn and plan for something that looks more normal next year.
It’s significant because, in the last week or two, those confidence levels had been dwindling fast.
Economists are still sticking to their guns on expectations the Reserve Bank will deliver one more 25-basis-point rate hike next month - taking the Official Cash Rate to 5.5 per cent.
Even Finance Minister Grant Robertson - who must have been smiling after the data was released - was cautious to emphasise that the cost of living remains the biggest challenge facing the economy.
The upcoming Budget would reflect this challenge with a focus firmly on spending, he said.
We all need to maintain that focus, but psychologically the notion that inflation has peaked is significant.
Compare the local trend to the panicked headlines in the UK right now. Inflation there is stuck firm in double digits at (10.1 per cent) and shows little sign of abating.
We are more or less back on par with Australia and safely in the middle of the pack when it comes to international comparisons.
The marked decline in the March quarter here was largely driven by lower imported costs - fuel prices for example came off sharply through the quarter.
But core inflation - which strips out highly variable numbers - remained steady.
Non-tradable - or domestically driven inflation - was still worryingly high, at 6.8 per cent. But it wasn’t as bad as expected.
The cyclone and flooding events did push food prices higher - up 3.7 per cent for the quarter - but the inflationary bump to construction costs appears to be dissipating across a wider time frame.
In terms of international comparisons, we are more or less back in the middle of the pack on inflation.
That does beg the question as to why our interest rates need to go so much higher than they have across Tasman.
The Reserve Bank of Australia has paused with the official cash rate at just 3.4 per cent.
One answer may be that it’s the RBA that’s called it wrong. There’s no shortage of controversy in Australia right now over RBA policy and the merits of reappointing Governor Philp Lowe.
Reserve Bank Governor Adrian Orr is expected to want to see more evidence that inflation is cooling down before he eases up on rate rises. Photo / Mark Mitchell
New Zealand is also a small, more open economy.
We are more vulnerable to international shocks on energy and the whims of financial markets and rating agencies. That has historically made us a more hawkish place when it comes to interest rate setting.
That said, I think there is scope to pause and wait while Kiwis roll off their fixed mortgage rates.
Today’s data suggests there is some room to assess the amount of damage we need to do to the economy to get it back in balance.
Most economists disagree with me. There is an expectation that Adrian Orr will want to see more proof that inflation is on its knees before he relents on rate hikes.
Either way, there’s no avoiding more job losses and business failures in the coming months.
But today’s data moves the finish line for the cycle bit closer.
It offers businesses and consumers some momentum and the potential to look through the gloom.
