An economist is warning it could take years for consumer prices to fall back to within the Reserve Bank's (RBNZ) average annual target.
It comes after Statistics NZ's consumer price index (CPI) revealed on Monday that inflation for the June quarter was at 7.3 percent. That was the highest inflation rate in over three decades, largely driven by rising rents and construction costs.
Independent economist Cameron Bagrie told AM the good news was it looked like inflation had peaked.
"The bigger picture is really about; How quickly are we going to go down the hill on the other side? And what we know at the moment is there's a lot of what we call 'inflation stickiness' - persistent factors - out there that could take a couple of years, or maybe three years, to get inflation anywhere near 3 percent," Bagrie told host Ryan Bridge.
"In fact, if you look at what's called inflation expectations, the Reserve Bank's got a two-year measure - and that two year-measure is saying, 'Two years down the track, inflation's still going to be 3.3 [percent].
"The Reserve Bank's got a mandate to get inflation between 1 and 3 percent, you're two years out and you're still at 3.3 is three years outside your target zone - that's an 'F' for 'fail' for any central bank. That's why they're lifting interest rates, it's not just about current inflation - the real problem here is expected inflation."
Bagrie said there were three major areas causing the inflation "stickiness".
"Number one: it's a lot of stuff beyond our control with regard to what's going on internationally; reconnecting COVID supply chains, what's going on in Ukraine and that could take a little bit of time to settle back down.
"The second factor is just the… mismatch here between supply and demand - we've got too much money chasing too few goods.
"The third thing is these evolving structural factors that are creating a few inflation headwinds. We've been in an environment for 20 years that we've called 'globalisation' - being connected internationally - now globalisation's started to unwind and we're starting to think about producing locally."
Bagrie said the economy was also being hampered by tightness in the labour market.
"There's a global shortage of labour - everybody's crying out for staff and a lot of it looks structural; era of bigger-spending governments without effective spending.
"Central banks will win at the end of the day but I suspect it's going to carry one hell of an economic cost on the other side."
Bagrie said the economy recessing was "an inevitability pretty early on".
A technical recession is when there are two successive quarters of negative growth. Since New Zealand's gross domestic product (GDP) contracted in the first quarter of this year, another contraction over the June quarter would put New Zealand officially in recession.
"The real issue is that do we go through the favoured 'soft landing' where you knock the economy round a little bit… or do we go through what's called the 'hard landing?'
"Historically, look at what's happened around the globe - when you tend to see inflation up in excess of 4-5 percent you're on track for a hard landing in order to get inflation anywhere near 2 percent.
"I think central banks have got their backs up against the wall in regard to what they're going to need - the bit of medicine - to get inflation back under control," Bagrie said.