Rampant price inflation 'a memory' by mid next year, Infometrics says

Wednesday, 12 July 2023

The path back to low inflation - Reserve Bank of New Zealand chief economist Paul Conway. (First published March 23, 2023)

By the middle of next year, the experience of prices going up so quickly that things shift out of the realms of affordability should be a bit of a memory for many people, Infometrics says.

It has released its latest economic forecasts, which show that inflationary measures are finally moderating after two years of costs and prices running “out of control”.

Chief forecaster Gareth Kiernan said the Reserve Bank was on track to get inflation back to the top of its 1% to 3% target band by the end of next year. He said that was a bit earlier than had previously been expected but the strength of migration taking the heat out of the labour market would have an impact.

“Although inflation is still higher than normal, there have been signs that underlying cost pressures are becoming less broad-based, which is the reverse of the trend experienced during 2022.

“Expectations about future inflation are also easing, and previous disruptions to supply chains have dissipated. Weaker demand conditions mean that firms now have less pricing power, leading to sharper pricing and a greater degree of discounting than throughout the last three years.”

He said an influx of foreign workers was alleviating the most critical labour shortages caused by border closures.

Annual net migration is set to peak at a record 93,000 in the second half of this year but to ease to a level below 40,000 by the end of 2024, as the unemployment rate reached 5%.

Food prices are rising at the fastest rate in almost four decades.

That would get households’ attention over the coming months, he said, as the rate of job creation did not keep pace with the rate of population growth.

Further official cash rate increases seemed unlikely, Kiernan said.

He expected cuts to start from May next year and the rate to fall to 4% by the second half of 2025.

Pressure on food and fuel prices would start to dissipate, he said.

“That experience of food going up in price so much I can't afford it – by mid next year that will be a bit of a memory for people.”

He said while prices were not expected to drop, over time people’s pay should rise.

Kiernan said the economy was likely to “flirt with” negative growth until the end of 2024, which could look like a milder downturn compared to experiences such as the Global Financial Crisis. But population growth would obscure some of the extent of the weakness.

“A 2.2% decline in per-capita GDP in the year to June 2024 represents a much more significant contraction. This result demonstrates the reversal of households’ fortunes as the economy has slowed. The effects on businesses of each of their customers spending less will only be mitigated by an increase in customer numbers associated with strong net migration.

“Be it a continued slowdown, a double-dip recession, or any other description, the economy is still going to look and feel weaker throughout the rest of 2023 and into 2024. That’s the price we’re paying to get inflation under control and put the New Zealand economy on a more sustainable path. At least we’re now seeing the effects of the tightening in monetary conditions coming through.”