Inflation & interest rates will fall; food prices to ease soon.
Households will continue to feel the pinch this year – with costs increasing up to $150 a week on top of a similar rise last year, says ASB chief economist Nick Tuffley.
“We are all a bit miffed to be spending $20 on a block of cheese right now and, of course, it’s just not cheese, it’s across many other things,” he says. “We are starting to feel the (cost of living) impact and people being careful with their money, simply because it’s just not going as far.”
Food prices rose 12.5 per cent in April compared with the same month last year- the highest level since September 1989.
Fruit and vegetable prices were up 22.5 per cent; and grocery items including eggs, which are now 63 per cent higher than a year ago, increased 14 per cent.
Other contributors were restaurant and ready-to-eat meal prices up 9 per cent and underpinned by rising wage costs; meat, poultry and fish increasing 9.5 per cent; and non-alcoholic beverages up 8 per cent.
“It is our hope that annual food price inflation has peaked (or is close to it) given lower global food commodity prices,” says Tuffley.
Households can expect a little more in the kitty with wage growth reaching 4.3 per cent in the year to March, up from 4.1 per cent in the December quarter and the highest level of annual wage inflation since the Labour Cost Index began in 1992.
Average ordinary time hourly earnings, measured by the Quarterly Employment Survey, increased 7.6 per cent to reach $38.93. That’s well ahead of the current inflation rate at 6.7 per cent.
Tuffley says food prices are being impacted by the floods and cyclones and the effect on crops in the short term: “Global commodity prices have been quite high as well, and those cost impacts are starting to fade. Food price pressures should start to ease over the next year.”
Spending patterns are also changing post-Covid, he says. “We had a big spend-up on goods, including toys and things to keep us amused during the Covid lockdowns. With the Covid restrictions removed and the border re-opened, people are spending more on services again and less on goods.
“They are going out and entertaining. They are travelling more and they are going to concerts and movies. We are back to more normal spending patterns.”
Businesses are dealing with not only cost pressures that have been with them for 18 months or so but also these shifts in consumer spending patterns: “There’s not just the cost challenges; the revenue challenges are now coming through.”
His advice? Businesses should be mindful about adapting to the customer changes. For example, it may have to be different cheaper product lines in the short term to meet the customer need of wanting to spend less money.
He says wage growth is likely to remain “fairly strong” this year; cost challenges will persist in the short term but ease over time as labour supply increases and the market softens.
“It does help employees who are getting the pay packets to keep their spending power up a little bit at a time when prices are still increasing,” he says. “That’s one thing that has helped compared with places like Australia – we have seen our wage growth keep up with inflation and that has helped insulate a little bit from those inflationary pressures.”
The Reserve Bank said in its latest Financial Stability Report that it is not currently seeing widespread financial distress amongst households or businesses.
But it expected more people will fall behind on repayments this year as they re-fix their mortgages at higher interest rates, and the economic slowdown the Reserve Bank is orchestrating will see more people lose their jobs.
Looking ahead, Tuffley says businesses need to be aware the slowdown won’t last forever and need to balance what happens when they come out the other side.
“We’ve been in an environment where it’s been really tough to get hold of good people. You’ve got to balance the risks of letting valuable people go and who will be needed for the eventual upswing – versus the cost savings you might get in the short term. It is still a tight labour market and we still see quite a lot of skill shortages around.”
There are signs that inflation is starting to come under control, he adds, and once the Reserve Bank has the confidence that inflation is falling back within its target band (under 3 per cent), it will feel comfortable cutting interest rates.
“We think this will start to happen in the first part of next year, and take the pressure off households and businesses.
“Households will start to have more money back in their pockets again, particularly at a consumer level. For businesses who carry debt, it means that debt servicing costs are starting to come down and helping the cash flows.
“We can look ahead to next year as seeing things being set up for the next upswing,” says Tuffley. “This slowdown is to get on top of inflation and we are not going to have these pressures forever – inflation will fall and interest rates will fall.”
For more business insights, tips and tools, visit: asb.co.nz/businesshub