Economist reveals why inflation is dropping faster in Australia than in New Zealand

Australia's inflation is falling faster than New Zealand's and an expert says the reason why could come down to wage growth.

Inflation figures were released in Australia this week and like Aotearoa, it's now sitting at 6 percent. The figure is lower than the Reserve Bank of Australia predicted which is increasing confidence the bank won't increase rates next week. It's also a significant drop from the previous rate of 7 percent in March this year. 

ASB Chief Economist Nick Tuffley told AM Early inflation rates are starting to fall fairly quickly across the ditch and are expected to get to 4 percent by the end of the year. 

"We have seen inflation over there start to fall quite quickly so their annual rate was 7 and it's now 6. The rate of increase over the quarter was 0.8 percent and that's about half of what they have been seeing recently, so we are really seeing signs that headline inflation is coming down quite sharply," Tuffley said on Friday. 

He said while Australia has similar types of inflation as New Zealand, our domestic inflation has been more persistent which means it might take longer to really start dropping.

"I think we've got to be a bit cautious because our own domestic-related inflation has been a lot more persistent than what it's been in Australia, and our inflation has held up for a longer period of time. But it does suggest that look, cross your fingers and wait and see, we should now start to get inflation coming back down," he said. 

"We do think our own Reserve Bank will be a little bit nervous after our own figures last week but we do see them as being able to keep holding on for a little while longer." 

Tuffley said New Zealand's labour market and very strong wage growth is probably the reason our inflation is stickier. 

"Obviously our inflation is coming down at a slower pace. The domestic stuff is strong. We've also seen a bit of an uptick in things like rents, construction costs, and other housing-related costs. 

"Now some of that could be storm-related, but it could just be a sign there is just a lot of pressure still in those areas.

"For us here, there will be a lot of focus on labour market figures next week. So the Reserve Bank will want to see the labour market easing, and wage growth slowing and that will keep that confidence that our inflation will keep coming down fast enough and it's that speed that everybody around the world is getting a bit nervous about at times."

He said Australia and New Zealand have similarities in terms of inflation but our wage growth has been stronger - which is both good and bad. 

"We probably had stronger wage growth here in New Zealand than in Australia and that's a key reason why our inflation is a bit stickier than theirs, and why our interest rates are a bit higher and the Reserve Bank here is likely to hold rates for longer than what we see in Australia," he added. 

New Zealand's inflation rate is currently 6 percent which is down from its peak of 7.3 percent but still well outside the RBNZ's target of 1 to 3 percent.