Two consecutive quarters of near record levels of inflation

Annual inflation did not budge in the December 2022 quarter, remaining at 7.2 percent for the second consecutive quarter. The main culprits of inflation, at a near 32-year record high, are a combination of increased costs in housing and household utilities, food prices, and international transport prices.

The tradeable component of inflation has been the main driver of consistently high levels of inflation. This includes goods and services which are imported or are subjected to competition from foreign goods and services (in domestic and foreign markets). Unsurprisingly, inflation in New Zealand has largely reflected global pressures, more so than domestic economic conditions. In the December 2022 quarter, annual tradeable inflation as measured by the Consumer Price Index (CPI) was 8.2 percent. 

But non-tradeable inflation, however, should not be ignored, as it also had a marked impact on inflationary pressure in New Zealand. This component of inflation includes goods and services not facing foreign competition and indicates how domestic demand and supply conditions are affecting prices. In the December 2022 quarter, annual non-tradable inflation was 6.6 percent. 

Households have been under significant pressure. In particular, food prices have continued to rise rapidly. Released the week prior to the CPI, the Food Price Index (FPI) revealed the largest annual increase in the index since April 1990. Annual food prices were up 11.3 percent in December 2022. 

Every trip to the supermarket is getting more and more expensive. Grocery list staples have increased drastically, as the bread and cereals subgroup were up 9.9 percent annually in December 2022 while the milk, cheese, and eggs subgroup were up 4.8 percent. The infamous domestic egg shortage was a key culprit in the latter sub-group. The long-anticipated change in farming regulations still impacted the market, although it was announced in 2012. 

Bad weather throughout the season has impacted fruit and vegetable crops across the country, meaning a double whammy for fruit and vegetable prices. High inflation and bad weather resulted in a 23.3 percent rise in prices annually in December 2022. The recent damage done by Cyclone Hale in key producing regions will further drive-up prices, so we do not expect the prices of fruit and vegetables to ease in the short term. 

The housing and household utilities group of the CPI was the largest contributor to the annual inflation of 7.2 percent in the December 2022 quarter. The price of materials continues to increase, while the cost of labour has been pushed up as a result of persistent labour shortages and growing wage expectations. Consequently, the cost of constructing a new home increased by 14.1 percent in the year ended December 2022. While actual rental for housing increased by 4.4 percent. 
 

Actual inflation for the December 2022 quarter came in slightly lower than what the Reserve Bank of New Zealand (RBNZ) was expecting. The RBNZ was expecting an annual increase in the CPI of 7.5 percent in the December 2022 quarter before slowing down to 6.4 percent in the June 2023 quarter. The RBNZ was also expecting non-tradeable inflation to be at seven percent, whereas it stayed at 6.6 percent. 

This result will be an important consideration for the RBNZ in the forthcoming official cash rate (OCR) announcement on 22 February. Although inflation was below expectations, it is still running rampant throughout the economy and persistent labour market shortages continue to pose a concern. 

The OCR will very likely see another 50 to 75-basis point hike. The exact increase will depend on how much weight is put on the lower-than-expected annual inflation and the strength of on-going pressures. Regardless, interest rates will keep climbing as the blunt tool of monetary policy is waved.