Annual inflation set to fall from its 7.3% peak

Friday, 14 October 2022

The consumer price index (CPI) records changes in the price of hundreds of goods and services. (First published January 20, 2022)

Economists are confident annual inflation will be shown to have passed a peak when Stats NZ releases new numbers on Tuesday.

The inflation update is approaching amid growing debate over whether the economy could remain “stronger for longer” than forecast, or will be dragged down further and faster than expected by heightened fears of a global recession.

The Reserve Bank forecast in August that annual inflation during the three months to the end of September would fall to 6.4%, while BNZ and ASB are forecasting a 6.5% rate and ANZ is picking it to come in at 6.6%.

Infometrics and Kiwibank say 6.8% and Westpac is topping out the forecasts with a prediction of 6.9%.

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* Isn't the Reserve Bank supposed to keep inflation down? So why haven't they?

Economists say the inflation rate in the September quarter will come in at six-point-something.

BNZ research head Stephen Toplis said there would be a huge market reaction if inflation didn’t drop from the 7.3% annual rate that Stats NZ recorded in the June quarter.

But no forecasters appear to expect a drop that would be large enough to dissuade the Reserve Bank from further raising interest rates.

Toplis said it wasn’t worth speculating how much of a decline could call into question BNZ’s current expectation of a further 50 basis point rise in the official cash rate next month, as a drop in inflation of that size was too unlikely.

Stuff polling suggests people’s concern about inflation is only gradually being replaced by fears about the impact of higher mortgage rates.

In a reader poll that ran between April and July, 52% listed inflation as their top economic worry and 13% said it was high house prices.

That has dropped to 49% and 12%, respectively, since after July, when readers were asked the same questions.

Meanwhile, the proportion of responses identifying rising mortgage rates as their top worry has risen by five percentage points, from 28% to 33%.

The proportion of responses from people identifying unemployment as their top worry has been little changed at 6%. More than 50,000 responses have been received so far, roughly equally divided between the two polling periods.

Toplis said a decline in inflation in the September quarter was inevitable given that the large 2.2% quarterly rise in prices recorded in the September quarter last year will drop out of the annual index this time.

That earlier rise had been the largest quarterly increase in the consumer price index since 1987, if the impact of a GST rise in 2011 is excluded, and has not since been surpassed.

Infometrics chief forecaster Gareth Kiernan said that based on its forecast, inflation would not have dropped at all in the three months to September this year if falling fuel prices were taken out of the equation.

“There is still a breadth of inflationary pressures across the economy,” he said.

The Reserve Bank pays most attention to “core” inflation in “non-tradable” goods and services whose prices are determined locally, when setting interest rates.

ANZ and the Reserve Bank are forecasting that non-tradable inflation will remain unchanged from the June quarter at 6.3%.

Kiernan believed it would probably take a drop in inflation to under 6% to cause the Reserve Bank to sit up.

But with a 5% rise already locked in from previously-reported rises in the prior three quarters, that would require quarterly inflation to plummet unexpectedly far, to less than 1% in the September quarter.