Soaring food prices expected to keep annual inflation at 7.2% in the March consumer price index data release this Thursday

Economists expect Statistics NZ’s consumer price index data to show annual inflation stuck stubbornly at 7.2% when released on Thursday morning.

This number would be marginally below the Reserve Bank’s forecast of 7.3% but not enough to make any difference to its official cash rate forecasts. 

An annual inflation rate of 7.2% would mean that prices had increased about 1.7% in the past three months, and would suggest that NZ is not really past the inflation peak. 

Last June’s CPI data, which put annual inflation at 7.3%, was the highest it had been since June 1990. The read this week will likely be only slightly lower and in line with the previous result. 

Concerningly, domestic inflation is expected to accelerate to 6.8%, from 6.6% in the December quarter, even as imported inflation drops from 8.2% to 7.2%. 

ANZ senior economist Miles Workman said RBNZ would be most concerned about non-tradable and core measures of inflation, which are both at risk of coming in hot. 

“Annualised, 1.7% quarter on quarter is consistent with non-tradable inflation running at around 7%, which is pretty scary when you consider how sticky non-tradable inflation tends to be”. 

There was a real risk that domestic inflation could get stuck at high levels, forcing a round of rate hikes beyond 5.5%, even long after global inflation pressures had returned to earth. 

ANZ and other bank economists expect the quarterly increase in prices to be led by food, housing, and an annual increase to cigarette and tobacco taxes

On Monday, Statistics NZ said food prices had lifted 12.1% in the past 12-months — the biggest annual increase in over 30 years. 

This won’t be helping inflation, but was actually lower than many economists expected after Cyclone Gabrielle caused widespread damage to crops in Hawkes Bay. 

Workman said everything from extreme weather and labour shortages, to geopolitical conflict and commodity prices had contributed to high food costs, which rose 3.7% in the March quarter alone. 

Housing-related costs are also expected to contribute to quarterly inflation. Rents have increased almost 1% since the December quarter and construction costs have also lifted 1.8%.

The two categories alone make up almost 20% of the entire consumer price index, and will likely be responsible for two-thirds of inflation in the quarter. 

There has also been extra cost pressure on household contents and transport groups, as people have replaced furniture and cars damaged in the cyclone. 

Kiwibank economists said food prices and rent were likely the most impacted by the severe weather events earlier in the year.

“With Cyclone Gabrielle devastating areas dubbed the 'fruit bowl of NZ', it’s no surprise to see a chunky double digit increase in fruit and vegetable prices,” they wrote in a note. 

“Just as we’ve seen unfold overseas, we expect inflation to be on a downtrend this year. Indeed, had it not been for the Cyclone, we likely would have seen a more convincing slowdown in inflation over the March quarter”.

BNZ senior economist, Craig Ebert said the CPI data alone will not be enough to determine whether inflation has peaked and will fall as forecast. 

“And it would seem [RBNZ], from its April actions and commentary, is not in a mood to imagine inflation relief that is not starkly there”. 

ANZ’s Workman said inflation data was the first in a trilogy of releases that will influence the central bank’s May Monetary Policy Statement. 

“The first quarter labour market release and Budget 2023 are yet to come, and both could easily end upon the more inflationary side”. 

Most economists expect RBNZ to lift the Official Cash Rate by another 25 basis-points to 5.5% next month before pausing to see how the cumulative 525 basis-point increase in interest rates affects the economy. 

ASB senior economist, Mark Smith said the CPI data, which he forecasts to be 7.2%, will be influential as it is the formal inflation target for RBNZ. 

However, he thinks any surprise in the data was more likely to land on the lower side of that forecast.

“Softening surveyed pricing intentions suggest there is the possibility that the pullback in consumer demand could translate into a sooner than expected moderation in inflationary pressures”