Economists, politicians concerned as annual inflation remains 'worryingly high' at 7.2 percent

Economists and politicians are concerned after New Zealand's inflation rate remained steady in the December quarter.

Statistics New Zealand data, released on Wednesday, shows the annual consumer price index (CPI) increased 7.2 percent in the 12 months to December 2022 - despite efforts to dampen demand. 

It comes after another 7.2 percent annual increase in the September 2022 quarter and a 7.3 percent increase in the June 2022 quarter.

While the figure is lower than the 7.5 percent increase the Reserve Bank of New Zealand (RBNZ) was expecting, it's still well above its target of 1 to 3 percent. 

Infometrics senior economist Brad Olsen told Newshub the good news is inflation isn't getting worse. But Olsen said that's where the good news ends. 

"The bad news, of course, is we haven't seen any moderation or any real tipping points in terms of prices coming back," he said. 

"We know that food prices, for example, have advanced at their fastest rate on record nearly going back 32-odd years. And again we are continuing to see very broad price pressures. 

"In the December quarter, 72 percent of all of the items measured in the CPI basket increased in price. That is the second-largest proportion of items increasing when you go back over the past decade and a half so there is still a lot of pricing pressure coming forward despite fuel prices pulling back and supply chains that are improving."

Olsen said inflation for services is also continuing to rise which suggests "we certainly haven't seen the end of inflation yet". 

He added another 75 basis point hike to the Official Cash Rate (OCR) in February should be expected. 

"Current expectations are that the RBNZ will increase the OCR by 75 basis points when they meet in late February. 

"The question now, of course, is if we are starting to get on top of inflation and it is starting to plateau, the risk is we could still see the RBNZ push interest rates up even further which could cause a sharper recession and if that is the case the RBNZ might have to bring interest rates lower to get through into 2024. 

"For now, though, I think there is a tricky balance. We know we don't want the RBNZ to overcook its response too much and flatten the economy. But at the same time it's important to remember inflation has stopped going up at the same pace [but] that doesn't mean we have gotten back to more normal levels. 

"The fact that it's still up 7.2 percent over the last year is quite a bit away from what the Reserve Bank is targeting at 1 to 3 percent. So there is still quite a bit of work to get inflation back under control," he concluded.

ASB senior economist Mark Smith agreed a 75 bp hike in February is likely. Smith added the figures show annual inflation likely peaked in mid-2022 but the outlook is still extremely uncertain. 

"Annual headline inflation is expected to cool over 2023, although the ending of transport and fuel subsidies in the first half of this year could slow declines," Smith noted. 

He said the looming recession, both globally and in New Zealand, will likely quickly dampen pressure on prices and cool inflation. 

But Smith said inflation looks set to "remain uncomfortably high for a while yet". 

Smith said given inflation is still "much too high and looks engrained", the RBNZ will continue to hike the Official Cash Rate (OCR). 

"This means further OCR hikes. OCR cuts could then follow. This would be preferable to declaring victory too soon on inflation, with the risk of more aggressive moves later on and likely greater economic damage if inflationary pressures turn out to be stubbornly persistent," he said. 

ASB is anticipating another 75 basis point increase to the OCR in February bringing it to 5 percent. Smith added the bank expects further hikes in April but cuts are then expected ahead of the previously anticipated August 2024 date. 

'Worryingly high' 

CoreLogic NZ's chief property economist Kelvin Davidson said while annual inflation isn't increasing it's still "worryingly high". 

"Looking ahead, it's not totally cut and dried about what this might mean for the near-term interest rate outlook. 

"On one hand, the figure is lower than the Reserve Bank's previous indication...But it's still a worryingly high number, and broadly speaking, above what bank economists had been anticipating. 

"Indeed, on balance, today's figures will probably curtail any talk of 'only' a 0.5 percent OCR increase on 22 February, and shore up the chances of a 0.75 percent rise - unless next week's official labour market figures turn out to be very weak," Davidson said. 

He said while a 75 bp increase has already been priced in by the financial markets, it's still going to cause more pain for many households. 

"Even if mortgage rates are close to, or at a peak, this doesn't change the fact that it's still expensive to be a new borrower and that many existing borrowers are yet to face up to the full extent of the rate increases already seen," he said. 

Davidson said it also means further house prices are likely which will come as unwelcome news for owners. 

Political reaction

ACT leader David Seymour said the figures show there is "no end in sight" for struggling New Zealanders. 

"This inflation rate is above expectations, as other countries turn the corner more mortgage pain is on the way because Adrian Orr has not been taken seriously. Interest rate rises to date have had no effect," Seymour said. 

"There's always a human cost to this sort of economic mismanagement. Household budgets have already been crushed. Yesterday Stuff reported on a family who might need to sell their family car to keep a roof over their young family's head as their interest repayments have increased by $450 per week already.

"Since inflation first hit 7.2 percent in June 2022, the bank has more than doubled the OCR from 2 to 4.5 percent and mortgage rates have followed. That hasn't worked so we can expect greater hikes as people are trying to pay for a summer of record food prices and get back to school with new uniforms, stationery, and bring-your-own-devices." 

National's deputy leader and finance spokesperson Nicola Willis said the figures show "inflation has its claws in the New Zealand economy and Kiwis are paying the ever-higher price". 

"Today's new data proves that New Zealand prices have continued to surge at a painfully fast pace...Alarmingly, this surge is occurring even while inflation eases off around the world, with lower rates of inflation now evident in the US, Japan and Canada and petrol prices falling quicker than many had predicted.

"Inflation now has a tighter grip in New Zealand because of homegrown problems like worker shortages, higher costs for landlords being passed on to tenants, and Labour's relentless commitment to yet more spending and borrowing. Tellingly, in the final part of last year, New Zealand's non-tradeable (domestic) inflation rate was higher than the international factor," Willis said. 

She said the figures are bad news for anyone with a  mortgage or credit card bill to pay because further OCR hikes are expected. 

Finance Minister Grant Robertson said the Government is sharpening its focus on supporting New Zealanders through the period of high inflation. 

"We know it is hard out there for New Zealanders in making ends meet. As the Prime Minister has said, the Government's focus will narrow to support New Zealanders struggling to pay their grocery bills and mortgages," Robertson said.

"The Government is committed to addressing the bread and butter issues in front of New Zealanders and the cost of living is top of that list."

Robertson said the Government is also doing its bit to bring spending down to more normal levels. 

"The Treasury is forecasting real Government consumption will fall by 8.2 percent over the next couple of years, which they say indicates that fiscal policy is supporting monetary policy in dampening inflationary pressures," he said. 

He said inflation is still being heavily influenced by "global factors" and domestically bad weather is playing a part in food prices. 

"Many economies around the world are feeling the effects of a global environment that is putting pressure on prices, with New Zealand's inflation rate of 7.2 percent below the OECD average of 10.3 percent. 

"Economists are forecasting New Zealand's inflation will remain elevated for an extended period compared with what has been experienced in recent times.

"There's no overnight fix to the cost of living. We're taking a range of actions to ease the pressure on families," he said.