Economists expect both headline and core inflation will fall into the Reserve Bank’s target range in the next three months, with 75% of June inflation unrelated to economic demand.
The consumers price index (CPI) data, released on Wednesday, showed headline inflation at its lowest level in three years (3.3%), but largely because of lower international prices.
Recently, there has been something of an obsession with non-tradable inflation as those parts of the economy are what the Reserve Bank supposedly has the most influence over.
Non-tradables are prices that do not face international competition. Annual inflation in that category was still elevated in June at 5.4%, down from 5.8% in March.
But not all non-tradable prices are easily influenced by the Reserve Bank. There are few key problem areas which monetary policy may only affect slowly and indirectly.
Vehicle and home insurance, petrol prices, actual rents and the cost of home ownership, alcohol and tobacco taxes, and local authority rates made up 75% of all annual inflation in June.
These items contributed 2.5 percentage points to the headline rate of 3.3% and each has a reason for getting more expensive that doesn’t have much connection to consumer demand.
Petrol prices are the only truly tradable good in that list. Oil prices were relatively low during the June quarter of 2023 but OPEC production cuts that July quickly changed that.
The cost of fuel has been volatile over the past year but the non-discounted price at Kiwi pumps was 40 cents higher at the end of this June than it was one year earlier.
Global interest rates do have an impact on fuel prices but local rates alone can only have a small effect on how much is bought and sold at the global market price.
Costs push inflation
Everything else in that list are what ASB economists call “cost-driven” prices which are partly a delayed reaction to previous inflation and are unlikely to be repeated.
Alcohol and cigarettes are the perfect example. These are being driven higher by taxes which are indexed to the Consumers Price Index, and so were lifted 6.6% last July.
Strip out the indexed tax and prices in this category increased just 0.3%. Beer and wine effectively got cheaper, with producers seemingly absorbing some of that added cost.
Vehicle and home insurance, while not directly indexed to CPI, are heavily exposed to market prices of the goods they are covering. Construction costs in particular have climbed a lot and made it more expensive to repair damage to a house.
Repeated extreme weather events over the past year have triggered a record number of insurance claims, worth over $3 billion, and caused insurers to push up their risk premiums.
The former problem shouldn’t be repeated, with generalised inflation now under control, and the latter is a “relative price” change that isn’t related to a supply and demand imbalance.
It is a similar story with local council rates, which are essentially a bundle of services exposed to all the other prices in the economy. Additionally, councils have suddenly stopped undercharging for the costs of building and maintaining infrastructure.
Rents are another quasi-indexed price as they closely track wage growth because New Zealand has a perpetual shortage of housing. Nominal incomes have been rising with inflation and rents are following along with some delay.
Tight monetary policy has already weakened the labour market and will break the wage–prices feedback loop, and so rents should start to stagnate with wage growth.
It's never been so over
Mark Smith, a senior economist at ASB, said annual inflation excluding these cost-driven items had fallen to 2.4% in June and was on track to be below 2% by the end of 2024.
“We do not envisage that higher costs from these pockets will feed through into generalised increases in inflation in the current environment. In fact, they seem to be a significant added cost to household budgets and could have a disinflationary impact on inflation,” he said.
Late on Wednesday, the retail bank changed its interest rate prediction after the Reserve Bank published its own measures of core inflation.
The central bank’s sectoral factor model of core inflation dropped to its lowest reading since September 2021 at 3.6%.
It uses 96 CPI components to separate prices into tradables and non-tradables and estimates core inflation as a weighted average of common changes in these prices, while excluding unusual price movements.
Another Reserve Bank model, which does the same thing without differentiating between tradables and non-tradables, showed core inflation was in the target range at 2.8%.
In fact, CPI was so close to target in the June quarter that just excluding volatile petrol prices would be enough to get it across the line.
Statistics New Zealand’s measures of core inflation, which trims off the largest changes both up and down, ranged between 3.4% and 3.8% depending on how much was trimmed.
While roughly 3.6% inflation is still too high, it is a massive improvement on the March quarter when these Stats NZ measures were showing a number closer to 4.5% and the Reserve Bank was at 4.2%.
Smith said the sharp drop in core inflation estimates gave him confidence the central bank would not need to wait for the next CPI release and would first cut rates in October.
ANZ and Westpac both also moved their first cut prediction from February to November.
Work it out
The Reserve Bank’s key core inflation measure has now been falling for four consecutive quarters and, if the current pace continues, the next print is likely to be at or below 3%.
New Zealand’s central bank was one of the first to hike interest rates in 2021, could it be among the first to cut them as well?
We shouldn’t get ahead of ourselves. While high interest rates aren’t able to impact some of those price changes described above, they are able to affect consumers' reaction to them.
For example, a Wellington gym recently told its members it was lifting prices by 5% due to significant rises in its own operating costs.
“We have faced annual increases of up to 9% in key expenses such as rent, insurance, utilities, and labour. The scale of these cost increases means it would be unsustainable for us to absorb them entirely,” it said.
Back in May, the Reserve Bank admitted that rent, insurance, and utilities weren’t particularly responsive to monetary policy. But high interest rates would limit firms’ ability to pass on those costs and trigger another round of generalised inflation.
Policymakers may want to hold interest rates steady until they are sure those last echoes of inflation are falling on deaf ears.
111 Comments
It's been decaying for some time. Cut the OCR, and only one thing of consequence will happen. A Starter Home median of $700,000 is going to go to $1,000,000 and then march onwards. And no matter how much we reckon we can print enough to accommodate the new Debt required and how cheap we make it to enable the transaction, one day, that will damage us all.
"In July 2007, first-home buyers were paying a median $299,000. A 20 percent deposit would have been about $60,000. Now, first-home buyers are paying about a median $700,000 for their homes, which means a deposit of about $140,000 if they require 20 percent."
But, of course, that rise of $400,000, more than 130%, in the median price hasn't been Inflationary at all...
As a nation we should want house prices to stagnate for a long period of time, at least until wages catch up with housing costs (for example, a median home should be no more than 4.5x the median household income).
The govt/ reserve bank have a golden opportunity to put the breaks on house price increases. If they do, then dropping the OCR would make sense.
No point in dropping the OCR if cheap borrowing is allowed to be used for leveraged house purchasing. Hell - people who have $100k equity available to borrow from their home are still thirsty to buy a rental. This type of one dimensional investment thinking needs to be stamped out... And destroyed so that people are terrified of investing in homes for a generation.
It's always a difficult choice between exasperation and confusion when people start bleating about the insurance costs going up. Take a higher excess and transfer less risk to the underwriter, they'll give you a lower premium in return. Honestly, does no-one stop to think about how things actually work any more?
Supposedly type 2 diabetes reduces lidfe expectancy on average by 6 years. "In 2021 EDOR contributed to a report into the scale and cost of type 2 diabetes. The report found that nearly 5% of New Zealanders have type 2 diabetes and this is forecast to increase by 70-90% over the next twenty years. The current annual cost of type 2 diabetes in New Zealand is $2.1 billion, which is 0.67% of our country's GDP."
The insurance industry in New Zealand is very consolidated which probably limits any risk of competition. Rate rises are bad for insurers because they hold large bond portfolios, the cost of that is being passed through to policyholders.
Event risk is only one factor that drives premiums.
We learned recently that our insurers have a maximum excess. Can't push it over $5,000 with any we've tried for some reason. I can only guess it's because if we push it too high the premiums would drop to a point where there's no profit in covering us in the event of a major claim.
I have the same view on insurance. Part of your premiums are their profits, another large part is paying for their administration and sales commissions, then there is paying for others fraudulent claims. Insurance is no free lunch. Best to only pay for insurance that you can't reasonably cover yourself.
"The cost of fuel has been volatile over the past year but the non-discounted price at Kiwi pumps was 40 cents higher at the end of this June than it was one year earlier."
25 cents of which is the fuel taxes coming back that Labour removed to try and buy the election, sorry, I mean 'help with the cost of living'
Sigh - at least National did not do the same thing and "buy" the election
"National campaigned on cost of living measures like nixing the Auckland regional fuel tax and not raising fuel excise taxes or road user charges this term".
What it didn’t campaign on was whacking an extra 50 bucks more on the cost of getting a rego for your car - or as the Transport Minister Simeon Brown reassured us, it’s just “a one off fee that people pay when they register their vehicle.”
National campaigned against Labours 5c per year fuel tax rises and said it wouldn't raise them during it's term.
Instead, they are just whacking 3 years worth of rises all at once right after their term ends. Compling with the letter but not the spirit of their campaign promise. In 2026 fuel taxes will be the same. The only thing that's difference is National have funded road building from general taxation as there isn't enough from fuel tax. (50% of this years NLTF comes from sources other than fuel tax/RUCs)
In all the excitement about core inflation being down to 3.3% everyone has forgotten that this figure is for one quarter only. What is wanted is the total of ALL quarters inflation over the last 3-4 years compounded to arrive at the true figure for inflation we have endured over the same period. Those of you who are good at maths do the sums so we can more accurately see what the compounded effect has been on workers and business alike, and so sheet home blame onto the heads of those responsible.
Why not aim for 0% inflation?
Why not have price rises based on real values, competition and consumer choice rather than credit supply issues?
Is not the whole purpose of capitalism, economic competition, mass production and market based economies etc, to serve the customer with better goods and services at cheaper prices?
You can download the raw index data and figure out inflation over any period you like quite easily:
https://www.stats.govt.nz/information-releases/consumers-price-index-ju…
I make it about 21% since the start of Covid.
Big daddy. - the article doesn’t make it clear that the 3.3% figure is actually the annualised inflation rate for the March 2024 year. Inflation for the March quarter was only 0.6%. The way the inflation data is presented is very backwards looking IMO. Inflation has collapsed.
The reserve bank has a nifty inflation calculator if you want to check out inflation over the last 3 or more years: https://www.rbnz.govt.nz/monetary-policy/about-monetary-policy/inflatio…
4 years of inflation compounded by category and split between tradable and non-tradable? Here you go.
I'd hazard a guess that this is due to the large increases seen in prices across the board started 3-4years ago and was an unprecedented period not encountered globally so far. Hence studying this period and the relative contributions towards the spike in inflation seen, and picking them apart to weed out the passing on of input costs vs the greedflation is a worthwhile endeavour. If we can find and prove that there was plenty of price gouging in certain sectors then we can learn from this and at least attempt to make appropriate changes to prevent this occurring again in future, for the betterment of all NZ'ers.
I've said it before and it's worth repeating, we held interest rates well below a neutral level for 10 to 15 yrs because of structural factors and this caused all sorts of imbalances. The 3y swap is currently 4% - not restrictive at all. It's embarrassing to hear talk back hosts constantly begging for rate cuts.
The real problem is that as a nation, all we have to dig us out of a slump is real estate. We've lost our mojo big time, it's embarrassing. We have no risk appetite, no vision and no aspiration.
Starts at the school level Te Kooti...they need to start to teach budgeting, compound interest, cashflow, revolving credit, how basic finance works in the real world, etc etc....no point just doing this at Uni level, start these skills as young as you can. I know with my youngest coming out they have non of these skills at all, yet can pass the levels no sweat.
That might help at the margins but it's not the problem. We simply cannot afford a bloated welfare state. We have neither the economic or intellectual horsepower and I would argue a "she'll be right" culture of playing it safe. This isn't just about Labour either, cancelling the ferries themselves (as opposed to the terminals) was a catastrophic blunder.
NZ is for school and retirement, your career has to be abroad.
Starts at the school level Te Kooti...they need to start to teach budgeting, compound interest, cashflow, revolving credit, how basic finance works in the real world, etc etc..
Boomer wisdom. Important to teach real knowledge like how compound interest does not necessarily work in an individual's favor. The kids might understand that better than the boomers.
This will level the playing field between children with financially illiterate parents with those who are lucky to get some money sense tought by their parents.
Excellent work Yvil.
Have you also been advocating for taxation reform to level the playing field between children with parents who have owned land and experienced massive tax-free capital gains and those whose parents haven't had any such capital gains?
Actually what they should teach kids is the best roles for employment outside of NZ. Following that the previous gen has built wealth solely on the speculation of housing assets over time. So inheriting a house, (especially during favourable times to use it for speculation on more housing) and sitting on it for more then a decade has earned more then a median wage where near 80% is put into savings. But I am sure they will not work out how to poison older family if they were so wealth focused. No matter the amount of savings the median wage did not keep up with the housing speculation, and sadly only by multiplying the number of wages now, (now above 3), does it even approach affordable. Yet I am sure a property in the sticks with no work available is still used to this day as an example by boomers that housing is still a reasonable level of affordability.
Most savings is now so low it is below inflation. So is the return on more balanced and low risk funds. Sadly even high risk funds often don't approach the rates of inflation for living needs & services that are essential. With more people suffering higher rates of illness we are not getting healthier or lowering the cost of additional private medical services needed over time either (with private costs experiencing exceptional inflation).
Hence due to the rampant housing speculation more of the younger gens who are stuck in NZ are turning to YOLO then FIRE practices. The burn the candle while you can because you are not likely to make it to retirement anyway (as they see it). Looking at out medical access for those in the younger gen many are not entirely wrong in that attitude (seeing the number dying in their 20s, 30s and 40s without the basic medical care they needed to survive).
It's clear that the higher rates are having an impact - and from the data (and backed up by what I'm seeing through my own business and other observations) wallets are shutting.
But if we slash interest rates don't we risk winding up in the same position we were in before - with runaway growth in house prices?
I'm personally affected (my interest rate has near tripled since I bought my house, and I've lost some work due to client businesses slowing down) but the spectre of re-inflating the housing market again probably scares me more to be honest.
I think you're right that it's a massive problem for NZ that all we seem to have is real estate. Whichever way we go, there is going to be pain ahead.
Why should the risk of investment property be significantly higher than owner occupied?
Also, a large % of business loans are secured against business owners personal property at std mge rates.
Whether it's a "business" or not is not the point, rate is all about risk
Yes there is, however we are a democracy and just voted in a party who campaigned on not doing so.
What interest rates do we need to not destroy the economy? The 3y swap rate is at 4% and core inflation is 3.6% (though falling). Do you need negative real yields for your business to work?
If you compare the 'Big 3' statistics from the most recent quarter to those in the March 2023 quarter, just before the OCR reached its terminal rate, you get:
GDP (yoy): was 2.7%, now 0.2%
Unemployment: was 3.4%, now 4.3%
CPI (yoy): was 6.7%, now 3.3%
It seems quite clear to me that current rates are restrictive.
Current rates are restrictive only because we allowed property prices to inflate to the point where today we collectively struggle to service the debt and when historically our economy wouldn't have skipped a beat.
A period of adjustment is required and that means sub-trend growth. I mean, Auckland was in the top 10 most expensive cities for a while, wtaf were we doing?
I had nothing to say about why rates are restrictive, only that they are (at least before they dumped 30-40 bps in the last week). In your first comment you said they weren't restrictive, which is the specific point I was addressing.
I don't disagree with your view on housing prices and debt, but I have been toying with the idea that it's better to ease earlier and more gradually as that may give the best chance of reaching an equilibrium and avoid slashing rates to an extremely low level again, which will set us up for another round of asset price inflation.
Good debate - I appreciate the dialogue.
TBH, I'd shed no tears over highly leveraged speculators taking a big haircut - reward and risk should go hand in hand. What I fear is that for every one of them, there are many more regular homeowners who have stretched to buy a house just so they can get on with life. If we have a deep recession they could lose their jobs and their houses and I'm not sure it's fair for the pain of correcting decades of house price growth should fall so heavily on one slice of the population. Best outcome would be years and years of mediocre returns so the shine falls off and people start allocating their capital elsewhere.
"We have no risk appetite, no vision and no aspiration" - you might need to find different company to listen to mate.
There's some incredible older folk supporting equally incredible people under 40 who are working to transition NZ to a climate positive, circular bioeconomy.
It's bigger than the industrial revolution.
Given that its foundations are in biology and ecology, the return is in both financial and non financial capitals.
A different ballgame to how the single minded GDP-pumpers might be used to playing, but therein lies the fun, if you dare
There is a get out of jail card we can play 'We amalgamate to become a 7th state of the lucky country'
The benefits a huge: Pay parity for essential services; No need to cross the ditch; Adopting a stronger currency; One of the world's most powerful passports; Puts to rest the origination of the Pavlova; Flag design done for us; ....etc etc etc
Would be great to have a referendum on this.
Sticky points are the Maori Cultural interests. This obviously would need to be addressed, but definitely do-able.
Strangely, even though nurses in Oz earn 20% more than nurses in NZ, Australian nurses were planning to go on strike to get a 20% pay increase due to the cost of living crisis there! Current stats are that there are already 27,000 NZ nurses working in Oz, with many more following each week. I wonder how short we are on nurses here?
Yet the pay increases in Aus asked for are also much higher as well & they are likely to get them. The work is far safer and with better staff patient ratios. They also have huge allowances for moving to jobs, for both accommodation & transport. In Aus they value the essential workers. In NZ we value the Health NZ marketers, consultants, admin and policy report writers who offer no value and save no lives compared to a single nurse. Seen in that we put through the pay equity for admin & back office staff in healthcare but denied it to community and elder care nurses. We spent billions on multiplying the bureaucracy with the last govt merging and then splitting health orgs and then adding mandates that serve no health or medical purpose, and were not according to actual health needs. Yet community nursing is still funded below minimum wage with no allowances for sick leave or public holidays. Go team.
According to a credible source of mine, they have over hired nurses on a national scale and are having to cut back on hiring currently. This as well as a large increase in bureaucracy for any hiring matters causing backlogs, on account of the government demanding ~6.5% cutbacks across the majority of departments.
Well for starters we already are using their engineering, building, food, medical and many other standards. We certainly will have no trouble merging regulations outside of the allowances cut out for cultural interests (e.g. fishing etc) and Australia already has provisions for indigenous cultural ownership of land (however it would be ideal to have all settlements completed prior).
The migration policies are quite different though. Also where would Aus be able to send the criminal 501s to if NZ is part of Aus... this would actually work out significantly better for the 501 & their families as well as for NZ communities as dumping people with repeated criminal behaviour into a community they have no ties (and no cultural integration with) and no family support was never going to work out well. It would mean they would be able to better engage in programs to support a change in behaviour if they had the family & cultural support around.
We are extremely fortunate tradable inflation is working in our favour, long may it continue because otherwise rates would need to be far higher.
One way or another RBNZ are now in the sweet spot looking at the last three quarterly inflation reads between 0.4 to 0.6%.
For example, a Wellington gym recently told its members it was lifting prices by 5% due to significant rises in its own operating costs.
“We have faced annual increases of up to 9% in key expenses such as rent, insurance, utilities, and labour. The scale of these cost increases means it would be unsustainable for us to absorb them entirely,” it said.
This is the harsh reality - the gym owners and members are unable to 'Look Through' these Non-Tradable inflationary increases, they bear the full costs (while commentators with vested interests suggest the RBNZ should 'Look Through' these types of increases).
Drop interest rates, demand bounces back, and the first thing every business in NZ will do is breathe a sigh of relief and put up prices. And thus we repeat the 1970's.
Meantime, nothing will be done about the 10+% increase in costs for things like rates, insurance, electricity, rents so more and more people will move to Australia to escape the ridiculous basic cost of living here.
NZ food is cheaper in Aus. In fact much of what NZ produces is cheaper in Aus, even the cultural taonga creation is cheaper (both in sourcing the raw materials and the cost for the creatives work). Which if you have big families the cost for cultural support is pretty big (we were lucky to have skilled bone &
But also rent was way cheaper given areas with the same population density/city and for the same quality of housing compared to NZ (where much of the Aus stats come from higher quality housing & higher population cities). Transport is light years ahead. Medical access is available (we cannot even provide GP access to much of the population when needed). Jobs are much more available and more diverse. Education is better for children & tertiary for adults so for young families moving to Aus is encouraged for the educational needs and future opportunities for their children.
It is becoming near irresponsible to raise kids in NZ if you are not already in a wealthy position. Also we have far more problems with social exclusion of children, social harm and discrimination then Aus. So even on an emotional basis Aus is a better and safer place for families (and that is saying a lot given the events in the two countries).
NZ has for a long time been a transition country to Australia but in general even our poor standards of living are still better then many developing countries that have civil wars and high risk authoritarian governments. But should NZ be in comparison on a performance & quality basis to governments that are likely to imprison or kill political dissidents, those that have near no healthcare or those likely to kill women for not wearing the right clothing or should we compare ourselves with the other OECD countries with similar systems?
see "on holiday" where you go out to eat expensive food on a near daily basis, are more likely to use private transport, and stay in the most expensive form of accommodation. Family living in Australia in the major cities find the costs for everything are near half that of NZ, especially for food in areas they were living, with wages twice as high in Aus so in essence they could buy housing, one could quit work fulltime and take on short time work or family care etc. Some family in Aus are doing so well they have jobs far in excess of what is on offer in NZ. They are no longer limited by financial concerns.
Even then Aus also has more access to market costing items as well which are significantly discounted on supermarket stock.
Service prices (like the gym example above) are always the last to go up when the economy experiences an external price shock to key imported commodities. The key commodities this time were oil and food with a late side-helping of rates and insurance (thanks to infra backlog and climate risks). The causal chain is depressingly obvious... as wages catch-up with the cost of living increase you then get a final echo of the orignal inflation in service industries where labour costs are significant.
Now, imagine if we learned from this oft-repeated pattern and designed a policy response to respond to it? Would that response look like an independent central bank hiking the cost of credit - adding to the cost of living that pushes wages up and increasing business costs (putting upwards pressure on prices) - until finally, 18 months later, the economy collapses having been drained of money and jobs?
Who pays for a gym without a large discretionary income as there is all this free exercise and weight lifting everywhere. I mean outside of those whose job it is to be at a gym or take on the unhealthy lifestyle of being muscle models.
There are services people need, e.g. medical, insurance, transport, food, power etc versus services that waste more money then they are worth and are purely luxuries e.g. tourism, entertainment, gyms, group & sports fees etc.
Housing is an old mix in between. People need functional, safe & secure, structurally sound housing but they don't need that new kitchen reno, or deck. They need plumbers and electricians, geotechnical trades and builders. Often though a garden is the most financially, time, & environmentally wasteful element, especially the upkeep of a monoculture patch that often serves no purpose to living necessity. Even vege gardens are incredibly inefficient and far more wasteful then farming of crops at scale and the materials footprint for the upkeep of them involves a lot more FF that goes beyond that needed for an actual farm.
Well that is certainly true in the medical industry as well. Ironically though most the best food is sent overseas, even to appear in Aus supermarkets, so NZ is often getting the poorer quality even in high end dining. Those poorer often just get less then that and are pushed towards more affordable unhealthy foods.
My home kill beef puts the NZ Supermarket crap to shame.... same with the lamb/sheep meat.
Jfoe the top 10% will always do well and the bottom 10% not so well, you don't need to understand stats to understand that fact.
The bottom 10% have many challenges that being kind does not effectively solve.
"The bottom 10% have many challenges that being kind does not effectively solve."
Maybe Not. But then again you don't need to create Unfair situations either ..... thank goodness zero hour contracts are no longer. People in precarious situations I would imagine would most likely suffer from chronic stress have both their physical and mental health affected, feel isolated and whilst in survival mode are not thinking of the future. In fact they've probably been robbed of seeing any kind of better future for themselves. Acts of kindness may not effectively solve everything but I like to think they may help at times.
It's hard living next door to the Nation of the Century - Australia. It is also very fortunate for New Zealanders at the same time, as we all know. Remember of the 8 billion people on planet earth way less than 2 billion of them live well, another 2 billion life okay with the rest being sub-prime [well & truly]. And remember too that most of this only started to be created less than 250 years ago.
If you want to work you will do well. If you don't want to work you will end up bitter & twisted, if you aren't already.
I think there is a large group of people quite happy to not work - they can pump out a couple of kids, earn more than the median wage on the benefit, and be gifted a brand new million dollar house for life. They can always shoplift a few grand of groceries, ram raid the local dairy, or grow a bit of dope if they need extra cash. What's not to like about that lifestyle?
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