Consumer prices rose 1.7% in the June quarter. This brought the annual inflation rate to 7.3%, its highest level since 1990. Inflationary pressures are widespread and should persist for some time to come. Today’s result reinforces our expectation for a series of further OCR increases over the next few months.

Consumer price index, June quarter 2022

Quarterly change: +1.7% (before: +1.8%)

  • Westpac: +1.4%, RBNZ: +1.4%
  • Median market f/c: +1.5%, range of +1.3% to +1.7%

Annual change: +7.3% (before: +6.9%)

  • Westpac: +7.0%, RBNZ: +7.0%, Market f/c: +7.1%

There has been no respite from the intense price pressures that have rocked New Zealand households, with consumer prices rising at their fastest annual rate in 32 years.

Consumer prices rose 1.7% in the June quarter. In the wake of strong price increases in previous quarters, this brought the annual inflation rate to 7.3% (compared to 6.9% in the March quarter). The last time annual inflation was this high was in 1990, following the GST hike.

Today’s result was much stronger than our own and market expectations. As discussed below, today’s result was also stronger than the RBNZ forecast. Upside surprises from our own forecast were split between the domestic and imported categories, with a notable upside surprise in construction costs.

Much of the strength in consumer prices is due to sharp increases in the price of food, gasoline and housing costs. However, the high level of inflation is not only due to a few specific elements. Price pressures have spilled over into all corners of the economy. This was reflected in the series of core inflation measures released by Stats NZ today, which smooth out quarter-to-quarter price swings and follow the underlying inflation trend. . Most measures of underlying inflation are now above 6%.

This generalized strength in inflation is due to a combination of supply-side cost pressures and firm consumer demand. On the cost side, continued disruptions to global and local supply chains have resulted in shortages of production inputs and consumer goods. There has also been growing upward pressure on local wages.

But what really set consumer prices on fire was the strength of domestic demand. Indeed, if we look at the areas where companies are reporting significant supply shortages, they are mostly in areas where demand has been strong, such as the construction sector. This is a big concern for the RBNZ because if demand is strong, inflation is likely to remain elevated even when the current pressure on operating costs (eventually) eases. And one of the main factors behind the strength of household demand has been the stimulus from low interest rates.

Looking at major product groups, import prices (sometimes referred to as tradable goods) have risen 1.9% over the past three months and 8.7% over the past year. Although largely due to fuel costs, other marketable prices have increased by 5.4% over the past 12 months. Notably, the June quarter saw larger than expected increases in prices for a range of durable and semi-durable retail items like furniture which tend to be imported.

Domestic (or non-tradable) prices rose 1.4% in the June quarter and rose 6.3% over the past year. This is the fastest annual rate of non-tradables inflation since records began in 2000. The RBNZ pays close attention to non-tradables inflation, and it is currently running at around twice the rate that we have seen over the past two decades.

Given the general pressure on operating costs, we expect inflation to remain elevated for the remainder of the year. In fact, we don’t expect a return to the RBNZ target range until the middle of next year at the earliest. This signals a continued squeeze in household purchasing power.

What does today’s result mean for the RBNZ?

Today’s result was stronger than the RBNZ’s last published forecast for a 1.4% rise. However, since this figure was released, the RBNZ had noted the risk of upside prices.

Last week, in its third straight 50 basis point hike, the RBNZ reiterated that it plans to continue raising the policy rate to a level where it is confident inflation will stabilize within the target range of 1 at 3%. And with price pressures continuing to escalate, nothing in today’s report dissuades them from going that route.

Given the persistent and broad-based strength of inflationary pressures, we expect the RBNZ to deliver a fourth 50 basis point hike when monetary policy is revised in August. We expect this to be followed by 25 basis point hikes in October and November, bringing the OCR to a level of 3.50% by the end of the year.

Details

Although the strength of pricing pressures was broad-based, the June quarter was marked by particularly strong price increases in a number of areas.

The biggest contributor to the high inflation in the June quarter was another large increase in construction costs. The cost of buying a new home rose 4.5% in the June quarter. This follows similarly large increases in recent months, with construction costs rising 18% over the past year. Construction activity has increased over the past year. At the same time, acute shortages of materials and personnel have led to rapidly rising input costs.

Adding to the pressure on housing costs, rents rose rapidly, rising 1.2% in the June quarter. The annual rent increase of 4.3% was the largest increase since records began.

The past three months have also seen a sharp 1.3% increase in food prices. This includes significant price increases for groceries and fresh vegetables.

Fuel prices have also risen sharply, rising 6.2% over the past three months. Despite the 25-cent reduction in the excise tax on gasoline, prices across the country have hit record highs in recent months. This ripples through consumers’ wallets, and the associated increases in transportation and production costs have driven up the prices of all kinds of goods and services.

The reduction in road charges and the halving of public transport fares that the government introduced earlier this year have partially offset the above price increases.

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