The Government gears up for a winter Covid peak, concern about the effects of alcohol on mental health and why the economy might be able to avoid a recession in the latest New Zealand Herald headlines. Video / NZ Herald
Quarterly inflation statistics will be released tomorrow and market commentators are torn between tipping the news to be bad or worse, but are uniform in issuing warnings that the worst economic pain could be yet to come.
Inflation, practically banished for decades after central banks made taming it a priority,has made an unwelcome return to the global and New Zealand economies over the past year.
Fuel and construction price shocks have catalysed with low interest rates intended to cushion the economy from the worst of Covid.
The Consumer Price Index (CPI), a measure maintained by Statistics New Zealand, rose 6.9 per cent for the year to March, the highest level seen in New Zealand since 1990.
Updated data, covering the three months to June, will be released on Monday and will have significant influence on how high the Reserve Bank will then have to push the Official Cash Rate.
The Reserve Bank forecasts the CPI, on an annualised basis, to hit 7.0 per cent. Most market economists have the rate edging higher with Infometrics' 7.3 the most hawkish.
A briefing note from ANZ, picking 7.1 per cent on Monday, flagged surging fuel prices - largely driven by uncertainty and sanctions flowing from Russia's invasion of Ukraine - as being the key inflation driver over the last three months. ANZ forecasters said fuel prices had risen 3.1 per cent in the quarter.
"Uncertainty remains high, with global commodity prices being buffeted by geopolitical developments, and trading-partner inflation continuing to surge. Domestic inflation risks are firmly on the upside, given still-high inflation expectations and an extremely tight labour market," ANZ said.
Infometrics chief forecaster Gareth Kiernan, whose team is picking 7.3 per cent for Monday, is hopeful that this will represent the high watermark for inflation, but conditions are likely to be choppy for years.
"We think that will be the peak of it, but it looks very soggy over the next 18 months."
He said high levels of borrowing in the economy - by governments, businesses and households - limited potential growth, and without the expected recovery of the tourism sector this summer the economy would likely be heading into recession.
Outside this sector, Infometrics says, "the bulk of the economy will feel like it is going through a contraction anyway".
Reserve Bank Governor Adrian Orr. CPI data will show how high the bank has to hike interest rates. Photo / Mark Mitchell
Kiwibank's chief economist Jarrod Kerr is similarly picking inflation to peak this quarter, but said even if were to reduce slightly towards the end of the year pain would persist.
"Transport costs are a big driver, and everyone's feeling the pinch from that: A rise in oil prices is like a tax on consumers. We've looked at our credit card spending on petrol, and the amount being bought has remained the same - it suggests everyone is spending a little bit less elsewhere," Kerr said.
"We're not picking a recession at this stage, but it'll be close."
The big question from the Reserve Bank is how high interest rates will have to be pushed to suppress inflation down to its long-standing target of between one and three per cent.
The Reserve Bank itself has flagged the likelihood the OCR will reach 3.95 per cent, already at 2.5 per cent after a recent series of sharp rises from near-zero, but bank economists and commentators believe this top may not be reached.
"It's a very difficult balancing act for them," Kierman said, adding that Infometrics were forecasting the OCR to peak at 3.5 per cent.
"Normally you've been looking at all of the domestic elements of the economy and looking to cushion downsides, but because of that massive inflation risk hanging around the Reserve Bank has to focus on that."
Kiwibank's Kerr said he believed there were signs the economy was already tightening, reducing the need for the Reserve Bank to rise the OCR above 3 per cent.
"We think they're on track to get the [inflation] job done, but there's a lot a pain being felt by households and businesses, and confidence is at recessionary levels and we don't think the central bank will have to tighten things further."
