Inflation has got a firm footing in the economy

The consumers price index (CPI), which measures the changes in prices of goods and services, for the September 2022 quarter puts annual inflation at 7.2 percent. An ever so slight decrease from the 32-year high of 7.3 percent the previous quarter. 

Inflation has gotten comfortable sitting outside of the Reserve Bank of New Zealand’s (RBNZ) target range of one to three percent as the unrelenting influence of the global economy and persistent COVID-19 disruptions have New Zealanders’ wallets stretched.
 

The main driving forces keeping annual inflation above seven percent include the ongoing supply constraints pushing up the cost of building a new home, and global pressure on prices of transport related goods and services, and grocery food.

Although the housing market has somewhat cooled-off in recent months, at least in comparison to previous highs, the cost of building a house continues to increase. The past three quarters have seen annual price increases in the cost of building a new home up 18 percent in March and June, and 17 percent in September. 

This is further backed by Core Logic’s Cordell Construction Cost Index (CCCI), which measures the cost of building a ‘standard’ brick and tile house, showing annual price growth of 9.6 percent – a record high since the series began.

Apart from increased labour costs, continued supply constraints remain the main culprit, as the demand for building materials far exceeds the currently available supply. 

Compared to the previous quarter, the price of petrol decreased by 4.5 percent in the September 2022 quarter. This decrease may bring some relief at the pump for many New Zealanders as we continue to grapple with the cost-of-living crisis, but it will hardly offset recent increases in petrol prices, which were up by 19 percent in September 2022, compared to September 2021. While the price of diesel rose by an astounding 74 percent. 

Consequently, this also had a compounding impact on domestic air transport, with the cost of flights having increased by 22 percent in the September 2022 compared to the previous year. Further compounded by increased demand for domestic flights following the easing of COVID-19 travel restrictions. Similarly, increased demand, as well as petrol prices, has pushed international air transport prices up by 20 percent between the June and September quarters. 

The ongoing Russia-Ukraine conflict does not bode well for petrol and diesel prices. And in turn, the global energy crisis will continue to take a heavy toll on consumers. 
 

Led by the soaring prices of vegetables, food prices in the CPI jumped eight percent in the September 2022 year. On an annual basis, the price of vegetables climbed 14 percent, but even more concerning, on a quarterly basis, they were up 25 percent – the largest quarterly rise since the series began in 1999. 

Furthermore, compared to September 2021, meat, poultry, and fish prices were up seven percent, while grocery food was up eight percent. Consumers are bearing the brunt of these increases, as everyday food items are getting more expensive, taking up more of each payslip. 

Poor weather is partly to blame, just are mounting global price pressures, with fertilizer becoming more expensive and harder to come by – both reducing production, and thus pushing up prices. 
 

Annual inflation of 7.2 percent no doubt locks in further increases to the official cash rate (OCR) at its next review in November. Currently sitting at 3.5 percent, in a bid to contain inflation, the next review will very likely take it to at least four percent. And given the level of inflation, further increases will follow. 

This may provide some relief to households from economy-wide price rises in the medium-term, but as it stands, households are still at war with inflation, fighting the cost-of-living crisis with no immediate answer possible.