An economist says while inflation has slowed, it does not mean prices are going down.
Inflation has slowed to its lowest rate in more than two years.
Stats NZ figures showed consumer prices rose 0.5 percent in the three months ended December, taking the annual inflation rate down to 4.7 percent from 5.6 percent, the lowest since June 2021.
Infometrics chief executive and principal economist Brad Olsen told Checkpoint prices were still increasing, but just not at the same “frantic pace” as they had been.
The higher prices were for essentials such as rent, which is why people were still feeling the pinch, he said.
“…for the likes of rents, for example, on average, that’s sort of about 10 percent of the inflation basket. If you’re a renter, you’re normally sort of spending 20 to 25 percent of your income on rent. They’ve increased 4.5 percent over the last year. That’s the second highest annual reading for rents that we’ve got on record.”
He said the 4.7 percent increase today, was from data from over the past year. So, while the cost of some staples had fallen in that time, they were still more expensive than they were pre-Covid-19 pandemic.
“Tomatoes at the moment are 41 percent cheaper at the end of 2023 than they were in 2022. That’s good news. However, at the end of 2023, they were still 39 percent more expensive than where they were back in 2019. So, you’re getting a better deal than a year ago, you’re getting still a worse deal than a few years back.”
Similarly, he said apples, bananas, oranges, and cheese were still up compared to pre-pandemic.
Shipping costs had also increased in that time, he said.
It was still some time before the inflation rate reached 3 percent or lower.
“I think the Reserve Bank will be encouraged by the latest numbers, but we’re not out of the woods yet, households are still feeling it. Food prices, for example, now up 27 percent on where they were back in 2019, wages though only up 23 percent. So still a big gap, still a lot of pain for a lot of households, but we are on a better pathway.”
‘Gradual OCR cuts’ expected
However, in an ASB report, senior economist Mark Smith said today’s data would “not provide the RBNZ with complete reassurance that its extensive monetary tightening to date is gaining traction”.
The return to under 3 percent inflation by the second half of 2024 would come down to the “unwinding of the price premium built up over the Covid period”.
“However, there is still plenty of uncertainty over the inflation outlook,” he said, because overall inflation had been above the 1 percent to 3 percent target band for nearly three years.
“The RBNZ will be wary of the risk of inflation being stuck above 3 percent and will maintain restrictive OCR settings to push inflation below 3 percent on a sustained basis.
“We expect a sequence of gradual OCR cuts to begin from the second half of this year (likely August). If, however, progress in lowering inflation stalls, OCR cuts could be delayed until later this year or 2025,” Smith said.
Inflation to drop later in 2024
Interest rates have not been included in the data, so households are still feeling the pinch.
Kiwibank chief economist Jarrod Kerr told Midday Report: “We’ll see inflation below 3 percent by the end of the year.”
He said imported inflation was reducing, but domestic inflation was still high, “off the back of the migration boom”.
“We’ve seen rents rising, construction costs are on the rise again; it is those domestic prices that are frustrating – and that’s what the Reserve Bank is focused on, they have an influence on domestic prices and they want to see them softer than where they are now.”
Kerr said inflation could drop to 2 percent early in 2025.
He said a cut in interest rates was likely in November 2024.
“The market is flirting with the idea that they may cut it in May. I have sympathy for that view, but timing is going to be difficult.
“The Reserve Bank has told us they really want to see inflation in their rear view mirror, they want to see inflation back in that 2 percent range before they act.”
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