Latest CPI release shows inflation is still elevated
By Christina Leung, Principal Economist for the New Zealand Institute of Economic Research
The 1.1 percent increase in consumer prices over the quarter brought annual inflation to 6 percent for the year to June 2023 – still well above the Reserve Bank’s 1 to 3 percent inflation target band.
The latest release of June quarter CPI data showed inflation remains elevated in the New Zealand economy. The 1.1 percent increase in consumer prices over the quarter brought annual inflation to 6 percent for the year to June 2023 – still well above the Reserve Bank’s 1 to 3 percent inflation target band. Although it is off the peak of 7.3 percent in June 2022, the details of the CPI release showed some stickiness in inflation for New Zealand.
In particular, the 1.3 percent increase in non-tradeable inflation indicates pockets of capacity pressures in the New Zealand economy. Labour shortages have driven up labour costs in many sectors, including hospitality, which was reflected in another strong increase in restaurant and takeaway food prices. Meanwhile, housing-related cost increases remain high, driven by continued strong growth in rents, housing construction costs and energy prices.
Although retailers report softer demand, there have been solid increases in the price of imported household goods, including clothing, footwear, furniture, and appliances. These increases to tradeable inflation were partly offset by a decline in fuel prices, given the easing in global oil prices. However, the reversal of both the 25 cents fuel excise duty tax cut and diesel road user charges discount at the beginning of July should boost tradeable inflation in the September quarter and keep CPI inflation elevated.
But signs of inflation pressures easing
Although inflation remains elevated for now, there are signs of inflation pressures easing in the New Zealand economy beyond the September quarter. The latest NZIER Quarterly Survey of Business Opinion shows an easing in labour shortages, particularly when it comes to unskilled labour. The reopening of international borders has allowed more firms to bring in workers from overseas. Meanwhile, retailers and building sector firms report easing cost pressures and pricing intentions. These indicators suggest price pressures will ease towards the end of this year. We expect annual CPI inflation to edge back to within the Reserve Bank’s inflation target band in the second half of next year.
Reserve Bank is comfortable it will not have to tighten monetary policy further
The Reserve Bank, at its July Monetary Policy Review, had indicated it remained comfortable that it would not have to increase the OCR any further. The central bank is comfortable that annual CPI inflation will head back towards its inflation target band, given the signs of easing in capacity pressures in the New Zealand economy.
We also believe the OCR has peaked at 5.5 percent in this cycle. Nonetheless, we expect the impact of higher interest rates will continue to transmit throughout the New Zealand economy even as the OCR is kept on hold. With around half of mortgages due for repricing over the coming year, we expect many households will be reining in discretionary spending in the face of significantly higher mortgage repayments as households roll off historically low fixed mortgage rates. This lagged transmission of higher interest rates should continue to dampen demand in the New Zealand economy over the coming years. We expect weaker demand and migration-led increase in labour supply will underpin the easing in inflation in New Zealand.
