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04 Feb 2022

New Zealand’s 5.9% inflation rate is highest in 32 years.

Stats NZ has reported that our inflation rate has skyrocketed to 5.9%, and that consumer prices during the last quarter of 2021 has put this figure at its highest point since June of 1990.

This 32 year high is concerning, not least because there is twice the level of wage growth at present and this could result in further wage inflation, in turn causing an inflation spiral.

Economists from ANZ had previously stated that they would not have been surprised over an inflation rate between 5.5 per cent and 6.5 per cent with the reserve banks’ estimate coming in at 5.7%.

This quarterly inflation rate is up an entire percentage point – from 4.9 to 5.9 – and it is expected to pressure the reserve bank to raise interest rates even further while the official cash rate is being reset on 24th of February, 2022. 

Petrol, rent, and other costs on the rise 

The higher inflation rate is explained in part by what is called ‘imported inflation’. This refers to factors like petrol prices which have increased 30% in the 12 months prior to the December quarter. With petrol prices this high, there is a flow on effect to other aspects of the economy.

Petrol price rises are part of the reason for an increase in the inflation rate but local factors are of more interest to the Reserve Bank.

However, prices are recoded as ‘up’ in almost every category that Stats NZ monitors.

While ‘imported inflation’ is a factor to consider, Stats NZ has stated that “non-tradable inflation” also increased to 5.3%. Non-tradable inflation refers to the price of goods and services which are determined primarily by local influences rather than international ones.

The amount of rent paid by New Zealander’s rose over the year by an average of 3.8% but the big leap was in new builds. Thanks to labour and materials shortages, the cost of building a new house has shot up by 16%. 

“The inflation rate for construction prices has been much higher in 2021 than we have typically seen in previous years,” - Stats NZ. 

Stats NZ also reported that while food process actually fell by 0.7% over the quarter, over the year in question they were still up by 4.1%. 

No Longer “Transitory”

Mark Smith, and economist for ASB, has forecast an inflation rate above 6% and stated that the inflation rate no longer looked like it was “transitory.”

“A broadening front of rising inflation is emerging that will be difficult to slow, and we expect annual CPI inflation to remain above 3 per cent well into 2023.”

He went on to say that the Reserve Bank has “more work to do”, and that raised the chances of the official cash rare rising more than the central bank had suggested previously. 

A national – and international – situation

Aaron Beck, manager at Stats NZ, has reassured people that New Zealand is not the only place where inflation is hitting hard. 

“Many other OECD countries experiencing higher inflation than in recent decades”. 

With ANZ agreeing that the current trend of inflation has “some serious momentum” is it important to note than inflation is currently on the rise globally.

This is due to policies put into place to try and soften the hefty impact of the pandemic. Additionally supply chain problems have restricted not only production of some goods but also the distribution of them.

The American inflation rate shot up to 7% in the December quarter while Australia’s annual inflation rate rose more gently to 3.5%.

Simon Bridges, finance spokesperson for the National Party, stated that the Finance Minister, Grant Robertson, needs to “reign in” his spending in order to prevent “adding more fuel to the inflationary fire”.

Ben Udy, an economist for Capital Economics, said that they expect inflation to be approaching its peak, with the 1.4% increase on the consumer price index in the three months prior to the end of December 0.1% higher than consensus forecasts.

 “Inflation is now consistent with the high level of inflation signalled in business surveys in recent months. And as capacity constraints ease in 2022, so too should price pressures.” 

Wages and their impact on the overall picture 

“With wage growth of only 2.4 per cent, well under half of inflation’s growth, New Zealanders are going backward. At the same time, we’ve got rising interest rates and record amounts of government spending,” – Simon Bridges 

While the Council of Trade Unions states that relatively quiet wage growth when viewed within the border context of higher inflation indicates that there is no sign of a wage-price spiral.

The Council of Trade Unions chief economist, Craig Renney, has said that with a relatively modest rise in labour costs of 2.4% over the year showed that rises in rises were not driving inflation.

“Whilst some economists may be worrying about a wage-price spiral, we have yet to see increased costs feed their way through to increased wages,” – Craig Renney

Renney went on to say that what the country really needs now is to ensure that people remain concerned and take action in protecting those who can least afford the higher costs – those without the margin to absorb the changes.

Mr. Renney suggest that businesses can do their part in helping out by ensuring that those employees with the lowest incomes receive wage increases that match the inflation rate. He goes on to say that the government can play their role by ensuring that welfare programs and the minimum wage is set to a level that helps workers stay on top of the current inflation and doesn’t let anyone fall behind. 

The follow on effect

With so many factors intrinsically linked to inflation, stats like the ones discussed here have a major follow on effect on the everyday lives of New Zealanders – not the least of which will probably be interest rates, every day costs, as well as major purchases and financial investments.

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