Taming inflation beast, slowly . . .

A109 Light Utility Helicopter flight with mayor Gisborne City from the air in November 2023.

Opinion

Inflation isn’t down on the canvas yet. But it is on the ropes.

News this week that annual inflation dipped to 4 percent in the first quarter (from 4.7 percent), was welcome — although, as economists have pointed out, there were some worrying signs of life buried beneath the topline data.

If we look at just the last quarter, the consumer price index rose 0.6 percent. In a sense that’s the more relevant figure because that is the inflation we are experiencing right now (as opposed to annual figures which factor in the rate from the middle of last year).

If we annualise the latest quarter we’d get 2.4 percent inflation — inside the RBNZ’s 1-3 percent target band.

Stats NZ points out that rising prices for alcohol and tobacco, and recreation and culture, boosted that quarterly number. Cigarette and tobacco prices rose 6.5 percent in the quarter; the annual tobacco excise tax increase occurred on January 1, 2024.

The latest figure also included an outsized rise in the cost of overseas accommodation, which goes into the CPI when booked in New Zealand . . . the spike coincided with February’s Taylor Swift mania in Australia.

But looking through those factors, domestic accommodation costs continue to rise above the topline inflation rate. Rising rents are a very real cost-of-living problem for many.

Economists break all these different cost inputs into two broad categories.

In the past few years of high inflation, many Kiwis have also been forced to learn about what economists call tradeable and non-tradeable inflation.

Non-tradeable inflation measures final goods and services that do not face foreign competition; it is an indicator of domestic demand and supply conditions. Tradeable inflation measures final goods and services that are directly influenced by foreign markets — like oil prices, electronics, building products.

It’s the non-tradeable inflation that is worrying; on an annual basis it is still way too high — 5.8 percent.

But we are making some progress.

UBS analysis shows that, after adjusting for seasonal patterns, all measures of quarter-on-quarter inflation eased further in the latest data. This includes non-tradeable CPI, which rose 1.6 percent.

Non-tradeable inflation will fall. As high interest rates continue to bite and the economy stumbles through a year of recession and low growth, supply and demand will work their magic.

Higher unemployment, and less consumer spending and investment, will put a cap on local pricing. But it is a hell of a cure and not something we should prolong, not least because the longer it takes to get non-tradeable inflation under control, the more risk there is of another global supply shock that drives up commodity prices and kick-starts the whole cycle.