Inflation slumps to 2.2%, but rates and rents a blackspot

Wednesday, 16 October 2024

Annual inflation has slumped to 2.2%, bringing it back within the Reserve Bank’s target band for the first time since March 2021, Stats NZ has reported.

The Reserve Bank and most bank economists had been forecasting annual inflation to drop to 2.3% in the September quarter, down from 3.3% in the June quarter.

So called “non-tradeable” or domestically-driven inflation fell further than most banks had expected, to the annual rate of 4.9%, down from the 5.4% rate recorded in the June quarter.

ANZ had expected that increase, which is closely watched by the Reserve Bank, to come in at 5.2%

The slightly steeper-than-expected declines are likely to fuel growing speculation that the Reserve Bank could slash the official cash rate by at least 75 basis points when it releases its final monetary policy statement for the year on November 27.

A 75bp cut would reduce the OCR from 4.75% to 4%.

As it stands, the “real OCR” — the OCR minus inflation — now stands at just over 2.5%, a level it has rarely topped since the global financial crisis in 2008.

That means there has rarely recently been a stronger monetary incentive for consumers to stop borrowing and spending and to keep money in the bank, or a stronger disincentive for businesses to invest.

ANZ senior economist Miles Workman is still forecasting a 50bp interest-rate cut in November but said the conversation was likely to be between that and a 75bp cut.

Ultimately it was the “real OCR” that mattered “in terms of putting the brakes on investment and consumption activity,” he said.

“So that certainly adds to the case the Reserve Bank should be getting interest rates down to a ‘more neutral level’ relatively quickly.

Council of Trade Unions economist Craig Renney said unemployment should now be the concern.

Finance Minister Nicola Willis said the drop in inflation meant the “era of crushing price rises is now over”.

“Together with the tax relief that took effect on July 31, and the Family Boost childcare payments that many families are now receiving, falling inflation and interest rates mean large numbers of families are now better off than they were a year ago,” she said.

“There is more work to be done to get the economy growing but New Zealanders can be confident we are headed in the right direction.”

The blackspots in the inflation data were a whopping 12.2% annual rise in council rates and a 4.5% rise in rents.

Together they accounted for more than a third of all the inflation recorded during the year.

Rents in Canterbury rose 6.6% during the year while Wellington brought up the rear with only a 2% increase.

Stats NZ consumer prices manager Nicola Growden said rates increases were the largest since the 1990s but had also been spread unevenly across the country “some higher than 12%, some lower”.

The removal of a subsidy on prescription charges and the January rise in tobacco excise duty also chipped in to annual inflation.

But an 8% drop in petrol prices and a near 18% fall in the price of vegetables helped keep the overall increase in prices low.

Prices paid for early childhood education fell almost 23% due to the introduction of “Family Boost” rebates.