Food prices are on the rise again. Could hat be a concern for the Reserve Bank?
Food prices are on the rise again. Could hat be a concern for the Reserve Bank?
Opinion by Liam Dann
Liam Dann, Business Editor at Large for New Zealand’s Herald, works as a writer, columnist, radio commentator and as a presenter and producer of videos and podcasts.
Local food prices rose 1.9% in January, the largest increase in nearly three years.
The kiwi dollar’s fall is raising the cost of imported goods, impacting inflation.
US inflation at 3% and Donald Trump’s policies could affect global economic recovery.
Local food prices bounced in January, up 1.9% – their largest monthly increase in almost three years.
Some of it is weird global commodity stuff – like the weather-related spikes in the price of chocolate, olive oil and dairy (which is actually good news for NewZealand on balance).
Meanwhile, US inflation has landed back at 3%, a worryingly high number considering we’re yet to see the impact of Donald Trump’s wild policies – almost all of which are expected to be even more inflationary.
Maybe. I mean, I know it’s going to be hard to find a slot in a daily roster of worries that already runs from AI job replacement to World War III.
But if you’re looking for another one, the prospect of inflation derailing New Zealand’s already precarious economic recovery is certainly ripe for picking.
I’ll say upfront that I remain optimistic that we’ll get our classic Kiwi recovery this year.
I just think we need to be aware that relying on the Reserve Bank to do all the heavy lifting looks increasingly risky.
In fact, we get another big cut to the Official Cash Rate next week. After being well signalled in November economists see no reason why the Reserve Bank won’t make another 50 basis point cut (taking the rate to 3.75%).
The local economic data released since the last RBNZ statement has largely fallen as expected.
But those expecting to see much of a cut passed through to mortgage rates are likely to be disappointed.
There are a couple of reasons for that.
One is that, as mentioned above, it has been so well signalled that it is now almost fully priced in by markets.
That means the banks have been able to position their mortgage rate settings ahead of the actual announcement.
Tariffs will raise the cost of imported consumer goods. Cracking down on immigration could raise the cost of labour. Even tax cuts – should he get them through – could potentially over-stimulate a US economy that is already growing near capacity.
We might get a bit of commentary about this stuff from the RBNZ next week in its monetary policy statement.
But there is so much uncertainty about how far Trump will end up going that it is difficult for it to factor anything specific into its forecasts about where rates are headed.
Perhaps Trump will prove the economists wrong. If his plan to end the war in the Ukraine works then oil prices will fall and help push inflation down.
While tariffs are expected to be inflationary they may also start a trade war which dampens global growth.
That would be disinflationary.
Who would know what the net outcome of it all will be?
Central banks have to work with the facts they have in front of them and can’t get diverted by speculation.
But the media can.
The New York Times reports Capital Economics estimating that Trump’s reciprocal tariff plan (the last in a moving feast of proclamations) would add roughly 2% to consumer prices, meaning that inflation would temporarily rebound to 4% later this year.
Regardless of how hawkish an approach the US Fed takes, it is certain to be too cautious for Trump.
Get ready for some fireworks there.
He’s already berating US Federal Reserve chairman Jerome Powell about not cutting rates fast enough.
Presidential pressure on Powell (who was appointed by Trump in his first term) is going to skyrocket in the coming months.
Trump can’t sack him. Although, that doesn’t mean he won’t try. He has to wait until Powell’s term ends in May 2026 before he can appoint someone more likely to bend to his policy demands.
Pressure on US Federal Reserve chair Jerome Powell will skyrocket in the coming months. Photo / AFP
Even then the Fed has some built-in independence via seven regional governors appointed for staggered 14-year terms.
How US central bank policy plays out is important to our outlook.
If US rates are on hold that puts more upward pressure on the US dollar and the kiwi dollar will fall, further lifting the cost of our imported goods.
That’s tradeable inflation – the stuff the Reserve Bank can’t do much about.
The Reserve Bank did such a good job of crushing the local economy that we can take comfort (cold comfort if you lost your job) that non-tradeable inflation is expected to keep falling.
Unemployment is still rising and wage growth is falling.
How far inflation falls is key to how far the Reserve Bank can go with rate cuts.
We’ll get new forecasts on Wednesday but the Reserve Bank currently has a wide spread on where it sees the “neutral rate” – somewhere between 3.5% and 2.5%.
Where the OCR ends up landing this year matters a lot.
If it’s 2.5%, there are likely some decent falls in mortgage rates still to come.
If it’s 3.5% then we shouldn’t expect much more of a break.
It’s all wildly unclear.
That’s why we shouldn’t be counting on rate cuts to save us from here.
There’s too much riding on the success or failure of Trumponomics.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
