Inflation rate drops slightly but prices continue to rise

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Prepare for higher interest rates. Economists say today’s poor inflation data makes it inevitable that the Reserve Bank will have to raise rates more aggressively.

The inflation rate was down, just barely.

Consumer price index inflation for the year to September came in at 7.2%, well above expectations of around 6.5%.

Of greater concern was domestic (nontradable) inflation, which rose from 6.3% to 6.6%.

“There is no doubt now that OCR will increase further,” said Infometrics economist Brad Olsen.

“We now believe that a 75 basis point increase in OCR is needed to outrun (or, more realistically, try to catch up to) inflation.”

Thanks to the fall in fuel prices in recent months, inflation should be between 6.5 and 7%.

Instead, the 7.2% jump followed a 7.3% annual increase in the June quarter and a 6.9% annual increase in the March quarter of 2022.

The culprits of inflation exposed

The main driver of annual inflation of 7.2% in the September quarter of 2022 was housing and household utilities.

Rising construction prices, housing rents and local authority rates have all pushed prices up.

For the quarter, the consumer price index rose 2.2%. And in the last quarter, vegetable prices have increased by 24%.

“This is the largest quarterly increase in vegetable prices since the series began in September 1999,” said senior price manager Nicola Growden.

“Tomatoes, lettuce and broccoli are driving this rise in vegetable prices.”

New home construction prices increased 17% in the September 2022 quarter compared to the September 2021 quarter.

Stats NZ released the new figures at 10.45am this morning.

On the home front, a tight labor market is keeping costs high.

The market reacts

In financial markets, the 2-year swap rate jumped to 5.05% as higher inflation is expected to mean the Reserve Bank must raise the official cash rate.

The New Zealand dollar was little changed after the release. He bought US56.40c.

Kiwibank economists said at least inflation’s path appears to be downhill from here.

“Several indicators suggest that pressure on global supply chains has eased significantly in recent months,” Kiwibank Economics said shortly after the CPI was announced.

“Global shipping costs have shifted firmly south and capacity is increasing with the construction of new vessels. However, the return to 2% is a long way off, with the Kiwi currency slowing the return.”

But there was no sugar coating today’s data.

“The CPI report was a shock, to put it politely. 66% of the items in the CPI basket rose. That’s very high.”

As expected, food and housing were the main contributors, Kiwibank Economics added.

Housing and construction inflation was still surprisingly high, they added.

Prices in the transportation category also increased, despite lower gasoline prices. But airfares have gone up 20%.

Economists were looking and hoping for signs that non-tradable (domestic) inflation was easing.

“Most of the decline in headline inflation is expected to come from a sharp drop in petrol prices,” ANZ chief economist Finn Robinson said ahead of the data release.

“While this is absolutely welcome, the fact that there is unlikely to be any sign of a general easing of underlying inflationary pressures means that monetary policy makers can take little comfort. limit of the overall decline.”

ANZ had forecast annual non-tradable (domestic) inflation to remain elevated at 6.3% and core inflation measures to remain strong, but to ease from recent highs.

“All stand up, [the] The inflation report is unlikely to contain the evidence needed to convince the RBNZ that core inflation has turned the corner,” Robinson said.

“Unless there is a sea change in the outlook, we see the RBNZ on track to take the OCR to a high of 4.75% in May 2023.”

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