Senior economist warns cost of living will rise, predicts annual inflation of 3 percent

A senior economist is warning the cost of living is about to get much more expensive as high inflation puts pressure on the economy. 

Infometrics principal economist Brad Olsen told The AM Show while it's good the economy is booming, it's likely Kiwis are going to see their household bills rise. 

"We have sort of overcooked the economy and in a sense that's a good position to be in, certainly better than when we were last year, thinking that it was doom and gloom and that we were going to have hundreds of thousands of Kiwis out of jobs," Olsen said on Friday.  

"But we need to recognise this overstimulation of the economy because what it means is that you and me - we are spending a fair bit of cash, a lot of Kiwis are getting that money out into the economy but we are bringing it forward from future years… it means that we might not have as much cash in future years so we just need to be careful."

Olsen said while the Reserve Bank is ending its money printing programme, we still need to be careful of the inflationary pressures. 

"Data out today is going to confirm what you and I and everyone else around the country knows and that is that it's becoming much more expensive to live, our food prices, petrol prices, rents, electricity, everything seems to be going up with so much money poured into the economy. 

"We were always expecting those inflationary pressures, I think we just have to be careful because this is going to hit Kiwis in the back pocket."

Olsen predicts Consumer Price Index figures released on Friday will show inflation rising 3.1 percent per annum.

"That really is across the board, we are seeing it across every channel and the risk as well is that this could continue. 

"The Reserve Bank here, and increasingly overseas, is expecting this inflationary spike to be temporary but we've got to remember with so much cash pumped into the economy, with so much demand but also difficulty around supply, it's hard to get stuff into New Zealand, all of that could mean that we are facing these cost pressures into the future. 

"And again that means that although we might be spending more, that's only because prices have increased. We might not be getting as much bang for our buck." 

On Thursday the Reserve Bank announced the official cash rate would remain unchanged at 0.25 percent. But it confirmed it's reducing the level of its current policy settings. From July 23, it will stop buying bonds under the Large Scale Asset Purchase (LSAP) programme, introduced in March 2020.

Effectively injecting cash into the economy to help reduce business and household borrowing costs, the programme has been nicknamed 'money printing'.

The Reserve Bank acknowledged the economy is continuing to perform better than expected coming through COVID-19.

"Aggregate economic activity is above its pre-COVID-19 level. Household spending and construction activity are at high levels and continue to grow," the statement said.

It expects inflation to rise in the June and September quarters. 

"These reflect factors that are either one-off in nature, such as high oil prices, or expected to be temporary in duration, such as supply shortfalls and higher transport costs." 

Barring any further economic shocks, it expects inflation pressures to "build over time".  But in the short term, there's still uncertainty around how fast and strong the rise will be.