Covid 19 coronavirus: What will the pandemic economy do to the cost of living?

Will prices rise or fall? Photo / File

Despite short-term spikes in food, economists expect prices and wages to be lower in the months ahead as the economy deals with Covid-19 fallout.

Consumer Price Index (CPI ) data due later today will likely show strong wage and price growth in the first quarter of the year.

It is expected to show inflation back near the Reserve Bank's target at around 2.1 or 2.2 per cent for the 12 months to the end of March.

But those numbers will be already be well past their use-by-date for monetary policy purposes.

The world is heading into uncharted economic territory. Highly unusual rules and restraints are likely to distort the supply and demand for some specific products.

But larger forces will be hitting demand hard.

That could mean more volatility for shoppers.

But, overall, most economists expect the Covid-19 pandemic will put deflationary pressure on the economy.

That means lower-than-usual demand for goods and services will dominate supply constraints.

Prices and wages will fall, or rise more slowly than they might have previously.

"Covid-19 represents a massive deflationary shock for the economy and it is likely to push headline and core inflation lower over the next one to two years, before recovering," ASB senior economist Mark Smith said.

The impact of the pandemic added another layer of uncertainty to the inflation outlook, he said.

But risks were tilted to the downside.

"The New Zealand economy is set to go into a deep hole and it will be a long time before the economy recovers its mojo," Smith said.

"A large and persistently negative margin of spare capacity and tepid wage inflation are expected to push core and non-tradeable inflation lower."

Downward price pressure would also be driven by a fall in global commodity prices.

In particular, lower retail fuel prices were expected to knock about more than 0.5 percentage points off annual CPI in the June quarter alone, Smith said.

Oil prices have plunged this year. Photo / AP

Policy measures like rent freezes would also drive the CPI lower.

"Household incomes will be lower, and confidence dented," ANZ senior economist Miles Workman said.

"Businesses will be cautious for some time. Demand for goods and services, both
here and abroad, will remain stagnant for a considerable period, and that implies
a muted inflation outlook."

ANZ expected annual headline inflation to slow to just 1 per cent by the end of the year and remain below this level for all of 2021, with only a gradual recovery.

It was likely the first quarter CPI data out today would get little market attention, given the absence of policy implications, Workman said.

But ANZ is picking CPI is expected have lifted 0.5 per cent in the March quarter, with annual inflation accelerating to 2.2 per cent from 1.9 per cent in the December quarter.

But as far as Reserve Bank (RBNZ) monetary policy and implications for interest rates, we are now in a whole new ball game.

"The RBNZ will be keen to prevent annual inflation outcomes from easing too far, running the risks of the New Zealand economy entering a deflationary spiral and blunting the effectiveness of the record-low OCR," ASB's Smith said.

"If the inflation outlook deteriorates further, we expect the RBNZ and the NZ Government to further step up policy stimulus measures. Let's hope we don't have to go there."