By: John Carran, Vice President, Investment Strategist and Economist, Jarden.
Annual consumer inflation surged to 5.9 per cent in the December quarter 2021, which is the highest it has been for 31 years. Measures of underlying inflation have also increased markedly, with trimmed mean measures ranging from 4.3 per cent to 5.5 per cent.
Strong housing construction, rental, and transportation cost rises were the main contributors to overall inflation as surging house prices and supply chain dislocation put upward squeezes on prices in these areas.
Aside from these major contributors, prices for recreation and cultural goods also increased strongly as supply chain issues also affected costs in these areas.
Consumer price inflation
Source: Statistics NZ, Refinitiv
More broadly, both strong tradable (domestically exposed) and non-tradable (internationally linked) inflation are contributing to surging overall inflation. This contrasts with New Zealand’s experience over most of the past two decades, when tradable inflation has been a substantial dampening influence on overall inflation.
Tradable and non-tradable annual inflation
Source: Statistics NZ, Refinitiv
Although annual consumer inflation may increase further in the March quarter, we expect inflation to moderate from the middle of 2022. As the impact of Omicron recedes among many countries in coming months, supply chain issues will likely become less intense, reducing pressures on goods and transportation price inflation. There are signs that supply pressures are already starting to ease, with overseas manufacturers reporting marginally fewer order backlogs and shipping costs appearing to have peaked.
Freightos Global Baltic Index
Source: Freightos, Refinitiv
In addition, it is possible declining house price inflation later in the year will help to moderate housing-related inflation. Housing-related prices have historically had a close linkage with house prices as the chart below shows.
Home ownership and house price inflation
Source: Statistics NZ, REINZ, Refinitiv
Monetary policy implications
The RBNZ will continue its path of hiking the OCR, with the next rise certain to occur when it meets next.
Although the December quarter annual CPI outturn is moderately higher than the 5.7 per cent expected by the RBNZ, we continue to expect the RBNZ to take an incremental approach to monetary policy tightening, with 25 basis point OCR hikes preferred. However, the RBNZ may forecast the need for more hikes over the next two years than it previously anticipated.
Because of moderating inflation and a slowing domestic economy, we see the RBNZ becoming more cautious about further monetary policy tightening in the second half of 2022. We do not see the RBNZ hiking the OCR beyond 2 per cent by the end of this year.
John Carran is an Investment Strategist and Economist at Jarden. The information and commentary in this article are provided for general information purposes only. It reflects views and research available at the time of publication, using external sources, systems and other data and information we believe to be accurate, complete and reliable at the time of preparation. We make no representation or warranty as to the accuracy, correctness and completeness of that information, and will not be liable or responsible for any error or omission. It is not to be relied upon as a basis for making any investment decision. Please seek specific investment advice before making any investment decision or taking any action. Jarden Securities Limited is an NZX Firm. A financial advice provider disclosure statement is available free of charge here.