Inflation fright: September quarter CPI was well ahead of market expectations. Photo / 123RF
OPINION:
Today's ugly inflation data means much higher mortgage rates are inevitable.
It also raises the risk of the economy sliding into recession next year as the Reserve Bank is forced to hike rates more aggressively.
The big question now is when will the higher rates finally start to slow the economy - and by how much?
Topline annual inflation for the September quarter landed at 7.2 per cent - down a fraction from the previous quarter (at 7.3 per cent).
The number was well ahead of market expectations at about 6.5 per cent and the Reserve Bank forecast of 6.4 per cent.
But beneath the surface, the numbers looked worse.
Non-tradeable (domestic) inflation was higher-than-expected - up to a record 6.6 per cent (from 6.3 per cent).
That reflected ongoing rises in the building and construction sector (up 17 per cent) and big rises in food prices - particularly fruit and vegetables.
Meanwhile, the fall in internationally-driven inflation based on lower oil prices was lower than expected.
The tradeable inflation rate, which measures goods and services that are influenced by foreign markets, was at 8.1 per cent in the year to the September 2022 quarter (Compared to 8.7 per cent previously).
The data means that the RBNZ will have no choice but to act even more aggressively, lifting rates to get ahead of inflation.
But the risk of overdoing it and pushing the economy into recession remains very real.
There are no optimistic outlooks.
The varying forecasts of economists simply reflected how soon they believe the economy will slump.
ASB led the pack, shifting its forecast for an official cash rate peak to 5.25 per cent.
That was broadly in line with the latest market pricing which implies a 5.4 per cent peak.
"We are treating much of the unexpected increases as being [an] economic signal (rather than noise), which looks unlikely to quickly reverse," said ASB senior economist Mark Smith.
"A self-sustaining high inflation dynamic looks like it is becoming increasingly embedded, with annual core inflation rates hovering well above the top of the 1-3 per cent inflation target band."
ANZ, which already had the highest rate forecasts at 4.75 per cent, lifted its expected peak to five per cent and called on the RBNZ to hike rates by an unprecedented 75 basis points in both November and February.
Kiwibank - which had previously stuck with a lower forecast of four per cent - also lifted its forecast to a 5 per cent peak.
That would likely move some fixed mortgage rates (already close to 6 per cent) up to around 7 per cent.
BNZ also moved to forecast call a 75 basis point hike in November but warned that peak rate predictions were now being "overdone".
But its logic for sticking with a 25 basis point hike in February and a peak OCR of 4.5 per cent was far from optimistic.
Rather, head of research Stephen Toplis argues, "the wheels may already have fallen off [the economy] by then".
He noted the rapidly deteriorating international outlook.
Stubbornly high inflation around the world, particularly in the US, hasn't helped the Reserve Bank's cause.
In the US last week the annual inflation rate (to September 30) came in higher than expected at 8.2 per cent.
The Federal Reserve's explicit commitment to raising rates until inflation eases has pushed the US dollar higher putting downward pressure on other currencies.
The relatively lower kiwi dollar means imported goods in New Zealand will cost more.
But outside of food and energy prices, the whole economy appeared to be running too hot, said Westpac senior economist Satish Ranchhod.
"The broad-based nature of inflation pressures was reflected in the suite of core inflation measures released by Stats NZ today, which smooth through the quarter-to-quarter swings in prices and track the underlying trend in inflation," he said.
"Most core inflation measures are now running above 6 per cent - well above the RBNZ's 1 per cent to 3 per cent target band."
Wage pressures would also be adding to the prices of many domestically produced goods and services, he said.
"We believe the labour market remains tighter than the RBNZ had assumed," says BNZ's Toplis.
The bank cut the Official Cash Rate but gave few clues as to what it will do next.
