Inflation has stopped rising, so when will interest rates start falling? Photo / 123RF
Inflation has stopped rising, so when will interest rates start falling? Photo / 123RF
Globally inflation pressure appears to have peaked, say ANZ economists.
But New Zealand is still at the peak of the inflation cycle and may linger there for some time thanks to the impact of the recent weather events adding pressure to food prices and the employment market.
In fact, therisks were now weighted towards inflation taking longer to beat and interest rates needing to go higher than currently forecast, ANZ said.
“The global inflation pulse appears – touch wood - to have peaked,” says ANZ’s Finn Robinson in the latest ANZ Insight report.
While some countries, like Australia, were still experiencing rising inflation, key global economies like the US and euro area had now seen headline inflation peak, he said.
In Australia, the Reserve Bank (RBA) is today expected to raise the official cash rate there by 25 basis points - to 3.6 per cent.
“In New Zealand, we are still at the peak of our inflation cycle [which you’d have to say is looking more like a plateau, at this stage], and the impacts of Cyclone Gabrielle will likely see both near and medium-term inflation pressures coming in hotter than otherwise,” he said.
The peak in headline inflation globally was an encouraging development after a series of pretty relentless upside surprises over the past two years, he said.
In New Zealand, domestic inflation developments were closely mirroring those seen overseas.
Peak disruption to supply chains seen over 2021 was easing.
Firms surveyed in the ANZ Business Outlook survey had noted some improvements to inward and outward freight disruption although manufacturing and retail firms were yet to see a significant improvement.
Global disinflation was coming through the goods side of the equation, Robinson said.
That included items like cars, appliances, furniture, and fuel, a category that represented more than 60 per cent of the New Zealand consumer price index (CPI).
“Goods inflation tends to be more responsive to global commodity price developments and tends to be more volatile generally than services inflation is,” he said.
“Unfortunately, services inflation is now picking up the baton from goods.”
Examples of services prices included residential rents, hairdressing services, vehicle servicing and repairs, housekeeping charges, and real estate services.
Given the importance of labour inputs in each of these examples, it was not surprising that services inflation tended to be closely tied to domestic labour market conditions, Robinson said.
In June 2020, services made up 37.4 per cent of the New Zealand CPI.
There were still serious risks that inflation would take longer to beat than was currently forecast, he said.
“The US is a key example of an economy that has seen headline inflation ease in recent months but is now facing a persistent services inflation problem.
CPI inflation in the US has fallen from a peak of 9.1 per cent in June 2022 to 6.4 per cent in January 2023.
While that was a big drop, it was clear that services inflation was becoming an increasing headache for the US Federal Reserve.
“That’s partly a symptom of a labour market that is still running very hot, with unemployment at 3.4 per cent [the lowest since 1969] and 1.9 job openings per unemployed person,” Robinson said.
“Wage growth is elevated and workers are hard to find, and that’s driving services inflation higher.”
In New Zealand services inflation had also continued to build highlighting the risk that, even as the global inflation pulse starts to fade, domestically generated inflation and our super tight labour market will keep the pressure on the RBNZ to remain tough on inflation.
“The devastating impacts of Cyclone Gabrielle are another complicating factor for the RBNZ,” Robinson said.
While the full cost of the disaster would not be known for some time, it was clearly going to be inflationary both in the near and medium term, he said.
Flash flooding from Cyclone Gabrielle ripped through Esk Valley on February 14. Photo / Supplied
”The very items in the CPI which were expected to help drive disinflation over 2023 [construction costs, food prices, and rents now face significant upside risks due to immediate cyclone impacts (at least at a regional level], as well as what’s looking like a significant and lengthy repair job to houses and infrastructure.”
That left the risks tilted firmly towards the OCR being lifted higher than ANZ’s current forecast of a 5.25 per cent peak.
Those risks weren’t one-sided and given the lag in monetary policy impacts on housing and the construction sector, a sharp economic slowdown was still possible.
“The spillover impacts of this could be larger than we are reckoning on,” he said.
Globally the move to the sharp rise to higher rates could “at some point make a more abrupt and deep hole in demand than expected”.
“But assuming the wheels stay on, we do see the risks as tilted towards inflation not falling either as fast or as far [or both] as we and the RBNZ are forecasting.”
