Inflation data unlikely to settle argument over how much to worry

Monday, 19 April 2021

These are some of the main drivers of New Zealand's economy.

Quarterly inflation figures due out on Wednesday may shed some light on whether interest rates may have to rise sooner than expected.

Statistics NZ reports on movements in the consumer price index (CPI) every three months, but there is heightened interest in this week’s release because of indications inflation may be slowly stirring in New Zealand and overseas.

The Reserve Bank has forecast a 1 per cent quarter-on-quarter rise in the CPI that would take annual inflation to 1.7 per cent, following a 0.5 per cent rise in the December quarter.

ANZ and Westpac are forecasting a 0.7 per cent quarterly increase while ASB, BNZ and Kiwibank all predict a jump of 0.8 per cent.

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Whatever the quarterly figure, there is likely to be room for disagreement about the implications.

Peanut butter, nut butter, supermarket shelves, premium prices for basic regular products

Some economists believe much of any rise in inflation is likely to be temporary, driven by short-term supply chain problems brought about by Covid driving up the price of raw materials and other costs.

Oil prices have climbed 30 per cent this year to US$63 (NZ$88) a barrel, while aluminium is up 17 per cent at US$2330/tonne and soy beans are up 50 per cent at US$1438/tonne.

It is a broadly similar picture across a range of commodities.

But behind the immediate cost pressures lies a more existential threat that increases in the monetary supply brought about by quantitative easing could lead to inflation snowballing, perhaps requiring significantly higher interest rates and triggering a deep recession.

Waikato University research fellow Leo Krippner told the NZ Economic Forum in Hamilton in March that the country probably had the best environment for the emergence of high inflation “since the 1970s”.

Inflation in the 1970s rose from 4 per cent to a peak of 18 per cent.

ANZ chief economist Sharon Zollner warned at the same conference that just a 1 per cent rise in mortgage rates would lead to a 5 per cent overall drop in Aucklanders’ disposable income.

For now though, inflation is forecast to remain confined to the foothills of any historical shift, should that even unfold.

BNZ said it wouldn’t be surprised to see “core inflation” measures running “clearly above 2 per cent” later in the year.

Data from overseas may be as important in shaping expectations.

The International Monetary Fund expects inflation in the US will reach 2.4 per cent this year – near a 20-year high – but has forecast that will be a “transitory phenomenon” that is not likely to last.

But analyst Morningstar cautioned on Monday that inflation might “not be far behind as global growth took off”.

The chairman of the US Federal Reserve, Jerome Powell, would be “praying inflation is not also at an inflection point”, the analyst said.