Inflation drops to 6%, warning Reserve Bank could be 'on alert'

Tuesday, 18 July 2023

Annual inflation has dropped to 6%, but domestic price pressures in the economy remain more stubborn than some economists had expected.

The annual drop in inflation has accelerated, falling from 7.2% to 6.7% in the three months to the end of March, and now down to 6% in the June quarter.

Stats NZ prices manager Nicola Growden said prices were still “rising at rates not seen since the 1990s, but at a lower rate than the last few quarters”.

Rising food prices were the biggest contributor to the annual inflation rate.

Taking food out of the equation, annual inflation was running at 4.6%, Stats NZ reported.

Finance Minister Grant Robertson welcomed the news.

“Inflation is still too high and we are committed to helping bring down the cost of living and supporting those doing it tough,” he said.

“Quarterly inflation is now at its lowest level in over two years, while New Zealand’s annual rate of 6% is below the OECD average of 6.5%.”

He said the Government was doing its bit to help by reducing spending to more normal levels, with real Government consumption forecast to fall by 5% by the beginning of 2025.

But National finance spokesperson Nicola Willis said other countries were experiencing more significant falls.

“In the last week, we have seen Canada’s inflation rate fall to 2.8%, and the United States’ fall to 3%. Australia’s inflation is also lower that ours, at 5.6%.

“New Zealand is now entering its third year of out-of-control inflation – the longest period of high inflation since the early 1990s.

“New Zealanders are continuing to be slammed with higher prices everywhere they look, and the Government has done nothing to bring it to an end.”

Most bank economists had been forecasting annual inflation would squeak in just under 6%, at 5.9%.

But the Reserve Bank had pencilled in a 6.1% rise.

Annual tradeable inflation, caused by the change in the price of goods and services whose prices are largely determined overseas, came in at 5.2% in the June quarter, despite a steep rise in international airfares.

A decent drop in tradeable inflation had been expected, but that was still lower than ANZ’s 5.3% forecast.

But Stats NZ reported that annual non-tradeable inflation, which is generally regarded as a better measure of domestic price pressures, was running at 6.6% in the June quarter, above ANZ’s 6.4% forecast.

Kiwibank economists said the update was good news overall. “The world war on inflation is being won, alberit slowly.”

But while tradeable inflation was on track, local influences were more mixed.

“When we slice and dice the data… we see some markedly mixed moves. Prices have risen pretty much across the board. The percentage of goods in the basket recording increases, rose. Food and housing prices recorded the largest gains. And they hurt the most households. Construction-related costs eased to 7.8% year-on-year – still hot – down from 11% – near boiling. Construction costs will continue to decline, sharply, as the housing market cools. Transport related prices helped, falling 2% over the quarter.”

ASB said the update would have the Reserve Bank “on alert” because that non-tradeable inflation was high and sticky. They said the update could increase the likelihood of another official cash rate increase.

“The broadening in price increases, and less discounting than expected, is at odds to what we had expected given the softening demand backdrop and indications from recent survey measures.”

Council of Trade Unions economist Craig Renney said it was pleasing to see quarterly inflation fall for the fourth quarter in a row.

“The worst should be behind us. However, the cost of going to the supermarket is still hitting consumers in the pocket.”

The figures are last official updates on inflation that will be released before the October election, with Stats NZ due to report the September quarter figures a few days after Kiwis go the polls.

Half-price public transport, the 25 cent-per-litre cut in fuel excise duty and the temporary cut in road user charges were reversed on July 1, so the impact of that would come through in that mid-October update, Stats NZ noted.

Much of the other economic data due to be released between now and the election is expected to be more sobering.

That is likely to include a small uptick in unemployment, confirmation that the economy is continuing to experience little if any GDP growth, and end-of-year Crown accounts due out in early October that now appear certain to show the Government’s debt and operating deficit tracking billions of dollars higher than forecast.