Expert confident inflation has peaked - but don't expect prices to drop anytime soon

An expert is warning New Zealanders not to expect consumer prices to fall significantly anytime soon.

Statistics NZ's second quarter consumer price index (CPI) revealed in July annual inflation was at 7.3 percent. That was the highest inflation rate in three decades, largely driven by rising rents and construction costs.

And, ahead of the third quarter CPI announcement next month, there were warnings Kiwis should get used to feeling the pinch at the pump and the supermarket for some time.

In some good news, Milford Asset Management portfolio manager Will Curtayne told AM on Thursday it looked like inflation had peaked in New Zealand.

"Hopefully that rate of increase… will begin to moderate," he told fill-in host Mike McRoberts. "The bad news is we don't think that means it goes back down to zero or a negative number and we get broad-based price decreases."

Curtayne said there were a few factors that would keep prices elevated.

"What we've seen in the last 10 years is we've got a few structural drivers of inflation returning to a world which hasn't seen them in a while; the first one is the great productive workforce of baby boomers is reaching retirement age.

"The second big reason we think inflation may remain higher is a world that has been globalising in outsourcing production of goods to… China and other countries is starting to see that trend slowing and maybe even reversed. The conflicts with Russia and Ukraine have made countries much more aware of where they manufacture and import their goods."

Curtayne said the world's economy was also being hampered by tightness in the labour market.

"The whole Western world is a similar demographic to New Zealand and Australia that's starting to see those baby boomers retire and, in the developing world, we've benefited immensely over the last three decades from nearly half a billion people in China entering cities and joining that global workforce effectively and that impulse is beginning to slow," Curtayne said. 

"It does mean that, while the rate of inflation probably will moderate from these really high levels we're seeing today, it will probably remain and bit higher than what we saw over the last decade."

Curtayne said the economy could experience a "grind of higher prices" for up to a decade. 

That could mean higher interest rates for longer, he said.

Expert confident inflation has peaked - but don't expect prices to drop anytime soon
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"[Higher interest rates] may keep sending house prices a little bit lower in the near-term and mean they don't recover as quickly as we might hope after that downturn," he said. 

"The good news, of course, is if labour supply is constrained that means… good bargaining for higher wages. We do think you'll see higher income growth for workers and if you have slightly lower house prices and higher wages, it's great for first-home buyers and those people who want to save up for that deposit to buy a house.

"We do think you'll see incremental Government support for areas that really need it and that is happening globally as well."