Inflation preview: Prices rising at fastest pace in over a decade

If you feel like the cost of everything is going up, you’re right.

And if those increases feel strange, that’s probably because this is the fastest rate at which prices have risen in at least a decade.

Economists expect Consumer Price Index data, due Monday, will show inflation landed between 1.5 and 1.8 per cent for the September quarter.

That’s an annual inflation rate of between 4.2 per cent and 4.5 per cent, the largest annual rise since the John Key Government’s GST hike in 2011.

But if we look through that tax policy spike, this will likely be the most inflation pressure the economy has seen since 2008 – just before the shock of the global financial crisis (GFC).

Back then the Reserve Bank had hiked the official cash rate to 8.25 per cent in an attempt to head off inflation concerns.

While the RBNZ has begun lifting rates again, New Zealand and the world face very different conditions this time around, with Covid lockdowns still limiting growth while related supply pressures drive costs up around the world.

“New Zealand is currently being buffeted by a perfect storm of inflation pressures,” says Westpac senior economist Satish Ranchhod.

Much of this was a result of offshore factors, he said.

Disruptions to global manufacturing are causing shortages of many consumer goods.

International shipping delays are exacerbating those shortages and resulting in rapidly rising transport costs for many goods.

“And on top of those factors, we’ve also seen global oil prices effectively doubling over the past year,” he said.

The whole world is struggling with these pandemic-driven supply side issues – and fiercely debating how long they’ll last.

But there have also been cost pressures that are specific to New Zealand.

“Most notably,” says Ranchhod, “the closure of our borders means that many businesses are struggling to source specialised labour. That’s seen wage costs pushing higher as businesses compete to attract staff.”

But wait – there’s more.

The strength of inflation is not just due to rising costs; demand has played a role too. Even with the Delta outbreak, consumer demand has stayed strong and the construction sector has kept booming.

“In sectors like construction, firm demand has meant that businesses have
greater scope to pass on cost increases into final prices, rather than taking a hit on margins,” Ranchhod said.

Crucially – and of particular importance for the RBNZ – strong demand meant that inflation pressures were likely to persist even when the current supply side pressures ease off, he said.

BNZ economists lifted their forecast for the September quarter after data showed stronger than usual food price increases and the ANZ Business Outlook survey showed confidence holding up.

“Food prices rose 0.5 per cent in September, which is more inflationary than it might look at first blush,” said BNZ senior economist Doug Steel.

“Food prices usually drop at the start of spring, but not this year.”

BNZ was picking that CPI inflation will continue to rise “aggressively” over coming quarters, he said.

It is forecasting annual inflation to peak at 4.8 per cent in the fourth quarter.

While the Reserve Bank is expected to continue hiking interest rates, economists believe it will remain cautious while New Zealand adjusts to living with Covid-19.

“There is the clear risk that the spike in inflation gets ingrained in wage and price setting,” said ASB senior economist Mark Smith.

“Higher inflation and an economy close to (or at) full employment over the medium-term horizon necessitates the further winding back of policy stimulus. Still, the RBNZ will likely tread carefully and in small steps.”

ASB is picking a further 50 basis points of OCR hikes by early 2022, with the 1.50 per cent end point being reached by late 2022.

On that basis we are still a long way from the heady days of 2008, when fixed mortgage rates topped 10 per cent.

But everything is relative. We should brace for an inflationary shock to the system.

Source: Read Full Article