December 01, 2021

Latest Monetary Policy Statement points to inflation near six percent

But it will fall quickly back to two percent.

To no one’s surprise, the Reserve Bank of New Zealand has increased the OCR again, but its warning about inflation is noteworthy.

In the latest monetary policy statement, the Official Cash Rate (OCR) saw a second consecutive 25 basis point increase, now up to 0.75. This was the second in what is expected to be a series of small increases for New Zealand. The Reserve Bank of New Zealand (RBNZ) has projected the OCR to reach above two percent in early 2022. However, for many people, what this said about inflation was more important.

Inflationary pressure is building

Consumer Price Index (CPI) inflation comprises of tradables inflation and non-tradables inflation:

  • Tradables inflation is the prices of goods and services more impacted by changes or competition in the international market
  • Non-tradables inflation is the prices of goods and services more impacted by changes in the domestic market.

Global prices are surging

Annual tradables inflation to September 2021, has increased by 5.7 percent, off the back of recent surges in global food prices and oil prices. Particularly oil prices have increased significantly, with global demand strongly outweighing the current global supply. Additionally, supply-chain disruptions are limiting the ability for global markets to match the fast growing demand in many economies, driving up global prices further.

While domestic pressure continues to grow

Also contributing greatly to inflationary pressure in New Zealand is non-tradables inflation, which in the year ended September 2021, increased by 4.5 percent. Significant demand for resources, unsustainable house prices and a tight labour market, which is constraining businesses, is contributing to the growing domestic inflationary pressure.

Demand for resources in housing construction-related industries has been one of the main contributor to growth in domestic inflation. Additionally, businesses are currently facing difficult capacity issues. With limited ability to source appropriate labour, many industries are facing labour shortages and are restricted in their ability to operate at full potential. There is also the concern about expected inflation growing in the economy, which can lead to increases in prices, with wage-setting and price-setting greatly dependent on this.

Inflation is expected to peak at near six percent in 2022

In the short-term, it looks unlikely that many of the main contributing factors to the recent surges in prices will ease. With both global and domestic prices driving inflationary pressure, the RBNZ is projecting CPI inflation to peak at 5.7 percent in March 2022.

But, looking further ahead, the RBNZ projects CPI inflation to return to around the two percent mark in late 2023. It is believed that supply-chain disruptions may begin to ease late 2022, which will improve the ability for supply to meet high demand, and allow global prices to decrease. Meanwhile, with the domestic economy continuing to open up, New Zealand will become more accustomed to living with COVID-19 and domestic pressures should ease long-term, decreasing local prices.

However, all of this is underpinned by the extreme uncertainty of COVID-19, and how the global economy, and the domestic economy continue to move forward.