October 19, 2021

Latest inflation rate exceeds all expectations

More increases almost certain

Lingering supply chain problems caused by COVID-19, higher house building costs and relatively full employment had many economists, and the Reserve Bank of New Zealand (RBNZ), expecting inflation to be greater than the 3.3 percent recorded in the 12 months to June 2021. However, most were not expecting it to reach almost five percent.

The annual inflation rate for the 12 months to September 2021, as measured by the consumer price index (CPI), was 4.9 percent. Annual price increases occurred across 10 of the 11 groups measured by Statistics New Zealand. The only group where prices fell was communications, which saw prices for equipment and services fall.

The increase in annual inflation was led by the goods and services many people would consider essential; housing, transport and food.

Annual housing and household utilities increased six percent, transport costs increased 13 percent and food costs increased just over three percent.

Following a 1.3 percent quarterly inflation increase in the June 2021 quarter, the quarterly inflation rate over the September 2021 quarter was 2.2 percent. This was the biggest quarterly jump since 1987, if the impact of a GST rise in 2011 is excluded.

The trends that drove inflation in the June 2021 quarter, including pressure on resources, high housing demand, supply-chain disruptions and sharp increases in oil prices, continued to drive price increases in the September 2021 quarter.

Housing and household utilities was the main contributor to the increase, rising 2.6 percent in the quarter. The main driver for this was 4.5 percent higher prices for purchase of new housing which makes up just over nine percent of the CPI. Construction firms are finding it difficult to get many of the materials needed and there are pressures from higher labour and administration costs.

The cost of housing and household utilities were also driven up by annual increases to local authority rates coming into effect during the period. Local authority rates and payments were up 7.1 percent for the quarter and for the year.

Transport prices rose 4.2 percent in the quarter, and were 13 percent higher than in the September 2020 quarter. Higher transports costs have resulted from higher prices for petrol and international air travel. The cost of international air transport was up 66 percent for the quarter. Petrol prices increased 6.5 percent between June and September and 21.5 percent on the 12 months to September 2021. Nationally, the average price per litre increased from $1.86 in September 2020 to $2.13 in June 2021, and then to $2.27 in September 2021.

New Zealand’s fuel price increases are part of a global rise in fuel prices.

As the world begins to open up global fuel prices are increasing which is feeding through to New Zealand consumers. The price of Brent Crude Oil increased from US$46 a barrel in September 2020 to US$79 at the end of September 2021. Petrol prices have hit record highs in the United Kingdom and prices in the United States have increased 46 percent compared to October 2020.

Food prices rose 2.7 percent in the September quarter, driven by an 11 percent increase in the price of fruit and vegetables. This was mainly due to higher prices for vegetables, up 19 percent. Higher prices for tomatoes, lettuce, and broccoli all contributed to this rise. The annual increase in food was 3.1 percent, led by a 5.1 percent increase in fruit and vegetable prices and a 4.5 percent increase for restaurant meals and ready-to-eat food.

Significant inflation is here for the foreseeable future.

The Reserve Bank, and many bank economists, were generally expecting higher inflation to be a relatively short-term phenomenon, and for inflation to drop back to within the Reserve Bank’s target band of one to three per cent before long.

However, as foreshadowed in BERL’s Winter Birds Eye View it is becoming increasingly unlikely that the inflation New Zealand is experiencing is a short term phenomenon. The recent ANZ Business Outlook survey found that 85 percent of businesses were expecting higher costs in the next 12 months and 64 percent are expecting to put their prices up.

Supply chain disruptions look set to continue into the traditional pre-Christmas peak. Pent up inflationary pressure for producers will continue to spill over into consumer prices, as supply chains continue to experience disruptions. In addition, with many industries experiencing labour shortages, owing to negligible inward migration and low unemployment, wage inflation is likely to accelerate.

ASB now expect annual headline inflation to move above five percent by the end of the year, with the clear risk that high inflation outcomes persist well into 2022 and Westpac expects “that inflation pressures will remain strong even when the current supply-side disruptions eventually ease.”

The IMF warns that “monetary policy will need to walk a fine line between tackling inflation and financial risks and supporting the economic recovery.” The concern for many New Zealanders with a mortgage, including a number of recent first home buyers, will be the pressure inflation puts on RBNZ to increase the official cash rate. If banks are forced to increase interest rates this will increase the mortgage repayments for many households, reducing expenditure elsewhere. This would lead to a slowdown in economic growth and place New Zealand’s relatively strong recovery at risk.