Warning for borrowers after annual inflation almost unchanged at 7.2%

Tuesday, 18 October 2022

The overall inflation rate gives a good measure of the bigger picture, but it’s just an average. Video first published August 30 2022.

Banks have begun bracing borrowers for a possible “triple hike” in the official cash rate to 4.25% next month, after Stats NZ reported that annual inflation had barely budged.

Prices rose 2.2% in the September quarter, taking annual inflation to 7.2%, which was only just under the 7.3% annual rate reported after the end of June quarter.

The Reserve Bank had expected a much larger drop in annual inflation to 6.4%, and no bank economists had been expecting inflation to top 7% this time.

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

But Stats NZ reported that steep rises in the price of housing construction, international airfares and vegetables had largely offset the relief provided by falling petrol prices.

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ASB responded by saying it expected the Reserve Bank to raise the official cash rate by 75 basis points to 4.25% next month and now predicts the OCR will reach 5.25% next year.

ANZ is now forecasting a 75-basis-point rise in November and again at the Reserve Bank’s first meeting next year, which would take the OCR to 5% by February.

National Party finance spokesperson Nicola Willis said inflation had become “embedded into the economy on Labour’s watch”.

“Widespread labour shortages and elevated government spending is lighting a fire under inflation, but the Government still won’t fix its broken immigration settings or impose fiscal discipline,” she said.

But Finance Minister Grant Robertson blamed “a volatile international environment” for the stubborn inflation, saying the country could not escape the global pressures affecting prices “at the pump, supermarket and the hardware store”.

He promised the Government would “continue to carefully target spending” and track a careful path back to surplus.

“This is not the time to put that at risk by borrowing for tax cuts that benefit the wealthiest the most, as we have seen recently in the UK,” he said.

Infometrics economist Brad Olsen described the latest inflation figures as “alarming”.

Interest rates would need to move higher and faster to combat pervasive pricing pressures across the domestic economy, he said.

“There is no question now that the official cash rate will rise further, and the Reserve Bank will need to weigh up how to get stubborn inflation under control,” he said.

IMF economist Harald Finger discusses the prospects for the New Zealand economy from Washington, DC.

“A 75-basis-point rise in November is now a leading option for the bank,” he said.

That would take the OCR to 4.25%.

Troublingly for the Reserve Bank, the average annual rise in prices of goods and services whose prices are largely determined locally rather than overseas – so-called “non-tradeable inflation” – climbed to 6.6%, from 6.3% in the previous quarter.

That was the largest rise since Stats NZ began collecting comparable statistics in June 2000 and is likely to cement expectations that interest rates are likely to rise significantly higher.

Westpac, which was the closest of the banks after predicting a 6.9% rise in prices, said there were some unusual price movements, including a large rise in the price of airfares, but the data showed price pressures were widespread across both domestic-produced and imported goods and services.

“We’re seeing inflation running red-hot across the economy, with particular strength in housing-related costs,” senior economist Satish Ranchhod said.

“We suspect that today’s result will have been a large upside surprise for the central bank, adding to the upside risks for the OCR.”

The price of constructing new housing continued rise at an almost unchanged pace because of “supply chain issues, labour costs and higher demand”, Stats NZ reported.

Stats NZ prices manager Nicola Growden said vegetable prices rose 24% in the September quarter alone, which was the biggest quarterly rise since the agency started collecting comparable figures in 1999.

A big drop in petrol prices had been expected to see inflation sink.

But Stats NZ reported that move was partly offset by a further 2.5% quarterly rise in the price of diesel and a dramatic 20% jump in the price of international airfares, when compared with the previous quarter.

Stats NZ has increased the weightings it gives to airfares and international accommodation in the consumer price index to a more normal level, in recognition of the resumption of more travel in the wake of Covid.

A breakdown to more decimal places shows how marginal the drop in annual inflation was, with the drop from the previous quarter coming in at just 0.08%.