The latest inflation data from New Zealand defied widespread forecasts that it would fall on Tuesday as it barely moved from a 30-year high, alarming economists and raising new questions about the inflation. effectiveness of interest rate hikes.
Prices rose 2.2% in the last quarter, bringing annual inflation to 7.2%, slightly less than the 7.3% recorded at the end of June.
The Reserve Bank had predicted inflation would fall to 6.4% last quarter, while big bank economists predicted it would fall between 6.5% and 6.9%.
The main drivers of inflation were food, housing, utilities and transportation. The cost of vegetables has reached its highest level in 23 years. The data showed that domestic (non-tradable) inflation rose, while imported (tradable) inflation started to decline.
Finance Minister Grant Robertson blamed the persistently high figures on an unstable international environment and said the government would ‘continue to carefully target spending’, while the National Party slammed the figures as ‘mocking the claims of the Plowing a strong economy”. .
Kiwibank chief economist Jarrod Kerr said the gap between the forecast and the actual figure on Tuesday was “alarming”.
“The report was a shock, to put it politely,” Kerr said, adding that global and domestic inflation was much stronger than expected. Economists had predicted that transport costs would lower inflation due to lower gasoline prices, but an unexpected 20% increase in international air fares shattered that.
New Zealand’s central bank was one of the first in the world to target inflation and price stability with interest rate hikes, Kerr said, adding that it was “far from that at the moment. “.
“Their failure in their tenure will only strengthen their resolve to do more – it’s pretty clear that they need to increase [interest rates] more and by larger amounts,” Kerr said. “Today’s report will be like a red flag for an inflation-fighting bull.”
Kiwibank predicted that the Reserve Bank would bring an “outsized hike” of 75 basis points (from 50 basis points) to the official exchange rate in November, with a possible increase to 5% in 2023. This would create additional pressure for households, Kerr said.
“The person on the street is doing it hard right now and that’s a very inconvenient prospect for the household right now. Most people are now facing much higher interest rates…higher inflation and in many parts of the world, including New Zealand, we have a declining housing market.
The effectiveness of interest rate hikes in reducing inflation in the current global environment is questioned in countries like the United States, which are also experiencing persistently high prices and focusing on aggressive rate hikes. Some economists say this comes at the expense of other inflationary culprits such as business prices, rising energy costs and supply chain disruptions.
Edward Miller, a researcher and policy analyst at First Union, warned that rising interest rates would only put further pressure on consumers, while doing little to bring down inflation.
“If inflation is being driven by oil, fertilizer prices and food prices due to the Russian war, then raising domestic interest rates can’t do much,” Miller said, adding that these price increases induced by the international community are transitory.
“By raising interest rates, they are imposing additional costs on New Zealand businesses, which itself drives up prices; in fact, they prolong the problem.
Miller cited the cost of vegetables as an example. Although it’s too early to tell what drove the latest spike in vegetable prices – one of the main drivers of inflation this quarter – last quarter’s Business Price Index figures showed that the largest increases in horticultural spending were for gasoline and fertilizer, followed by rising interest rates. .
“All of this should underscore to the Reserve Bank that essentially we are not facing a situation of demand-driven inflation, but rather a supply-side jolt, resulting from a combination of the Russian invasion of Ukraine and post-Covid supply chain shocks.”
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