But he said there were good reasons why that might not feel true for lots of households.
“You’ve got to experience a wage rise a couple of times with inflation running below that before you feel that real pick-up in your purchasing power.
“You can get pointy-headed economists like me saying it’s over but households don’t feel it straight away.”
He said things should start to feel better for households, particularly those who refix mortgage rates, by the middle of the year. Slightly more than 80% of home lending is due to refix in the next 12 months.
“After two years of near-recession people want to feel better a bit sooner but even if inflation is at 2%, if your rent is up 4%, it’s going to take time for people to feel better about their financial situations.”
BNZ chief economist Mike Jones agreed there was a difference between inflation and the cost of living.
“They often get lumped together. You would say inflation is no longer a concern, or it’s under control,” he said.
“That might gloss over the fact that inflation has soared in the last couple of years.
“The level of prices is still at really stretched levels relative to household incomes, particularly if you look at the different components - essentials, rates, insurance, food, I’m not surprised households feel they are still facing into some of those headwinds.
“It’s going to take some time for incomes to catch up. Once purchasing power has been eroded as it has been when inflation spiked, it does take some time claw back.”
He said the second half of the year should feel better for households as the economy started growing again and businesses were able to pass on pay increases.
Infometrics chief executive Brad Olsen said many households were still feeling pressure because they remembered being able to pay much less for things relatively recently.
“Lots of households are going ‘I used to pay X dollars a week for whatever item and now I’m paying a lot more than that … that reference point has shifted so dramatically in such a short space of time. That’s still causing a bit of pain.”
He said while previously the inflation surge had everything going up in price at a rapid price, there was now more divergence.
“If you’re a household spending more on fuel then that fuel price is lower than it was a year ago but rent increases are higher, mortgage payments obviously, too.
“Depending what you’re buying at the supermarket, that’s changed around. If you’re a household buying more dairy then you feel that more than a household that’s not.”
He said a lot of people might have thought that when prices went up, they would eventually go down again.
“The inflation rate has come down but prices are not generally going to go down from the levels they are at. Insurance in a year or two year’s time is not going to be cheaper than it is. Rent, the same. For some people all that mentally is quite tough to go through.:”
What about interest rates?
This quarter’s CPI was slightly higher than the Reserve Bank had expected, driven by largely imported inflation.
Economists said it was unlikely to be enough to change the bank’s mind about a 50bp cut to the official cash rate next month.
Jones said the OCR was still well above what would be a neutral rate, and everything pointed to it needing to be lower.
“The numbers say ‘keep going on the path you were on’… our view is that the 50bp cut in February has been pretty well baked in to market expectations. Thereafter and into the second half of the year, things get more murky.”
Olsen agreed it was unlikely the Reserve Bank would move away from a 50bp cut. But he said there were questions about the future. Bond rates and swap rates had lifted, and global inflation expectations were higher.
“There might not be as much room for the Reserve Bank to go as much lower as everyone is expecting.”
Some people were expecting banks to continue to shift rates down as the OCR fell, but there were international factors that could temper that, he said.
“We might be closer to the bottom of the interest rate cycle than people assume.
“That’s where the balance of risks lies at the moment … Rather than ‘I might lock in an interest rate and they plunge tomorrow’, that’s not where the risk likes at the moment.”
-RNZ
