Any way you look at it, yesterday's inflation report was ugly.
At 5.9 per cent, the annual increase in the consumers price index was both wide and deep, the largest for 30 years and even worse than the 5.7 per cent the Reserve Bank had forecast.
Perhaps the most telling comparison is with the position a year ago. Then the headline annual inflation rate was 1.4 per cent, or just 0.3 per cent on a broader measure which includes interest rates. Now both measures are 4.5 percentage points higher.
Two things have driven most — nearly 70 per cent — of the increase since then: tradables and construction costs.
Tradables prices are essentially those which are determined offshore. They include things we import, like oil or most manufactured goods, or export, like dairy products.
Collectively they represent 40 per cent of the consumers price index by expenditure weight.
Normally they are a strongly moderating influence on the overall CPI. Over the past eight years tradables prices have risen by an average 0.5 per cent a year, offsetting an average 2.85 per cent for domestic or non-tradables inflation, and sufficient to limit the average annual CPI inflation rate to 1.85 per cent over that period.
But that was then and this is now. Pandemic-related disruptions to supply chains and a steep rise in global energy prices have seen tradables inflation reach 6.9 per cent in calendar 2021, outstripping the domestic inflation rate of 5.3 per cent and contributing 46 per cent of the overall CPI rise for the year. By contrast, for most of 2020 tradables had a disinflationary effect, subtracting from headline inflation.
The distinction between tradables and non-tradables inflation is important for monetary policy. There is not much the Reserve Bank can do to influence international prices. Its concern on that front is whether inflation from that source persists and contributes to a rise in inflation expectations.
The International Monetary Fund, in an update to its world economic outlook published this week, is moderately encouraging about global inflation (unlike GDP growth).
It expects inflation in the advanced economies to slow from an annual rate of 4.8 per cent last year to 2.8 per cent in 2022 and 2 per cent in 2023, but with a lot of fingers crossed: "Assuming medium-term inflation expectations remain well anchored and the pandemic eases its grip, higher inflation should fade as supply chain disruptions ease, monetary policy tightens and demand rebalances from goods-intensive consumption towards services," the IMF says.
It points to futures markets indicating oil prices will rise about 12 per cent this year, considerably less than in 2021 when fossil fuel prices almost doubled, but still an increase. The Ukraine crisis, however, poses an obvious upside risk to global energy prices.
In New Zealand, petrol prices rose 31 per cent last year and together with "other vehicle fuels" accounted for a fifth of the annual inflation rate.
Another risk of imported inflation arises from the tension between China's zero-Covid policy and the infectiousness of the Omicron variant. Which of those will prevail and how much disruption to supply chains in the workshop of the world will occur in the meantime?
However, it is non-tradables or domestic inflation which is arguably more important for the Reserve Bank and interest rates. It is the behaviour of domestic price setters where the bank has traction.
A conspicuous contributor to the rise in non-tradables inflation over the past year has been housing construction costs. Although they have a weighting of 9 per cent in the CPI, they accounted for 23 per cent or 1.4 percentage points of the annual rate in 2021 and show no sign of abating, rising 16 per cent in the December quarter.
But the increase in prices has been widespread. In the December quarter alone just over 60 per cent of the 650 items in the CPI, representing 70 per cent of the average household's spending, increased in price.
One measure of core inflation, the 10 per cent trimmed mean — which disregards the highest and lowest 10 per cent of price changes and reflects the broad mass of prices in between — came in at an arresting 5 per cent, up from 4.4 per cent in September and 1.8 per cent a year ago.
Crucial to whether that persists will be the extent to which wage and salary earners are able to secure a raise, from either their existing employer or a new one, to compensate for that increase in the cost of living.
The more who do, the more worried the Reserve Bank will be about a 1970s-style wage/price spiral taking root and inflation expectations becoming, as central bankers like to say, in doom-laden tones, "unanchored". Next week's labour market statistics will be telling on that point.
One of the limitations of the CPI as an indicator of the cost of living is that it does not include interest costs, even though mortgage interest is a significant expense for many households.
Statistics New Zealand does however provide a series, all groups plus interest, which does include interest costs which have a weighing of just under 6 per cent in the expanded basket.
That measure has been considerably less onerous than the official CPI since the Reserve Bank eased policy in response to the arrival of Covid-19. As recently as the year to March 2021, the interest-inclusive measure of inflation was just 0.2 per cent.
It is now 4.8 per cent.
Yesterday's CPI numbers, coming hard on the heels of menacing inflation indicators in last week's quarterly survey of business opinion from NZIER, will only stiffen the Reserve Bank's resolve to keep raising the official cash rate. ANZ economists reckon it will hit 3 per cent, from 0.75 per cent now, before they are done.
And CoreLogic says some 60 per cent of home loans come up for an interest rate reset over the next 12 months.
Cup your hand to your ear and you may be able to hear mass gulping in the suburbs.