Annual inflation has hit a near 10-year high of 3.3 per cent after prices rose by a shock 1.3 per cent in the three months to the end of June.
The inflation figures released by Stats NZ were much higher than expected by forecasters and are cementing expectations the Reserve Bank will raise the Official Cash Rate to 0.5 per cent next month.
Finance Minister Grant Robertson said the inflation was a “problem of growth”.
ROBERT KITCHIN/STUFF
Finance Minister Grant Robertson talks inflation after surprise figures showed the annual rate hit a nearly 10-year high.
“The economy has obviously been operating at a level that’s far exceeded expectations and the recovery has been very strong. We’re seeing that in growth and the unemployment data – that is a good thing,” Robertson said.
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“It also comes with potentially with other matters and that includes the inflation numbers that we’ve seen today. The system is set up to be able to manage and deal with this, but clearly it’s an unexpected development from where we were a year ago.”
He said he would not tell the Reserve Bank how to do its job, or to pick between its employment mandate and inflation mandate.
“The [Bank] is perfectly capable of looking at both parts of the mandate and working out how to manage that in any given situation,” Robertson said.
Robertson did not believe the country was at maximum sustainable employment, and said he had no intention of rolling back any fiscal stimulus – noting most of that had already been deployed.
“While unemplyoment is at a relatively low level there is still slack in the labour market – there are still a number of people who would like more hours than they currently have.”
Robertson blamed external factors such as the rise in petrol prices relative to the year prior for much of the inflation.
ANZ described the rise in inflation as ‘monstrous’ and ASB said it now expected inflation to approach “4 per cent plus” by the end of the year, with a risk high inflation would persist well into next year.
Westpac economist Satish Ranchhod said financial markets were pricing-in a 90 per cent chance of an August rate rise after the release of the inflation figure, with the two-year swap rate – an indicator of interest rate movements – rising 7 basis points to 1.11 per cent.
Bank economists had been expecting annual inflation to come in at between 2.6 and 3 per cent, and the number was “much stronger” than banks or the Reserve Bank had expected, he said.
Stats NZ’s figures showed inflation has already exceeded the upper band of 3 per cent targeted by the Reserve Bank.
Significantly, only a little of the unexpected size of the jump in inflation could be explained away by higher prices for goods and services whose prices are essentially set by overseas markets, including a 16 per cent annual rise in the price of petrol.
Reserve Bank former chief economist, John McDermott, explains how inflation is measured and how it manifests itself.
“Non-tradable” inflation, which reflects supply and demand conditions inside New Zealand and is often more closely watched by economists, reached 1.2 per cent during the quarter to also hit an annual rate of 3.3 per cent.
ASB, ANZ, BNZ and Westpac all brought forward their forecasts for a Reserve Bank rate rise to August on Wednesday, after the central bank acknowledged the economy was performing more strongly than anticipated and unexpectedly announced a complete halt next week to the purchase of new bonds under its quantitative easing programme.
But ahead of the inflation figure, the banks were indicating a fair degree of uncertainty about their new forecasts.
Economists will now be watching whether the spike in inflation looks likely to be short-lived, or starts to feed through into higher annual wage demands and becomes self-reinforcing.
Ranchhod said the 3.3 per cent figure was “consistent with a picture of strong underlying inflation pressures”.
ANZ concluded that “inflation is here, it’s strong, and the Reserve Bank has to respond to it as soon as possible”.
It said the economy was at risk of becoming “dangerously overheated”.
Stats NZ prices manager Aaron Beck said the biggest contributor to quarterly and annual inflation had been an increase in the cost of building new housing.
The cost of building a new house leapt 4.6 per cent during the three months to the end of June and 7.4 per cent over the year.
Beck said that reflected both supply-chain problems and an 18 per cent increase in demand for residential building work over the year.
“Several construction firms have told us that it is hard to get many of the materials they need to build a house, and that there are higher labour and administrative costs,” he said.
John Hawkins/Stuff
The average price of second-hand cars leapt 13.9 per cent in the year to the end of June.
The figures show consumers are not imagining much higher increases in the price of many common goods and services.
Transport costs rose 9.4 per cent over the year, the price of household utilities rose 3.9 per cent, restaurant and ready-to-eat meals rose in price by 4.3 per cent and the price of staying in the likes of hotels, motels and Airbnbs in New Zealand was up 17 per cent.
The average price of buying a second-hand car has soared nearly 14 per cent over the year, as has the price of buying women’s shoes and bicycles.
