Consumer prices rose 1.7% in the June quarter. That took the annual inflation rate to 7.3%, its highest level since 1990. Inflation pressures are widespread and likely to persist for some time yet. Today’s result reinforces our forecast for a series of further OCR hikes over the coming months.
Consumers Price Index, June quarter 2022
Quarterly change: +1.7% (prev: +1.8%)
- Westpac: +1.4%, RBNZ: +1.4%
- Median market f/c: +1.5%, range +1.3% to +1.7%
Annual change: +7.3% (prev: +6.9%)
- Westpac: +7.0%, RBNZ: +7.0%, Market f/c: +7.1%
There’s been no let-up in the intense price pressures that have been buffeting New Zealand households, with consumer prices rising at their fastest annual pace in 32 years.
Consumer prices rose 1.7% in the June quarter. Coming on the back of the strong price rises in previous quarters, that took the annual inflation rate to 7.3% (up from 6.9% in the March quarter). The last time annual inflation was this high was in 1990 following the hike in GST.
Today’s result was much stronger than our own and market forecast. As discussed below, today’s result was also stronger than the RBNZ’s forecast. Upside surprises to our own forecast were spread across domestic and imported categories, with a notable upside surprise in building costs.
Much of the strength in consumer prices has been due to large increases in the price of food, petrol and housing costs. However, the high level of inflation isn’t just due to a few specific items. Price pressures have been boiling over in every corner of the economy. That was reflected in the suite of core inflation measures released by Stats NZ today, which smooth through the quarter-to-quarter swings in prices and track the underlying trend in inflation. Most core inflation measures are now running above 6%.
Underlying that broad-based strength in inflation has been a cocktail of supply-side cost pressures and firm consumer demand. On the cost side of the ledger, continued disruptions to global and local supply chains have resulted in shortages of both production inputs and consumer goods. There has also been increasing upwards pressure on local wages.
But what’s really lit a fire under consumer prices has been the strength of domestic demand. Indeed, if we look at the areas where businesses are reporting significant shortages of supplies, they’re predominantly in areas where demand has been strong, like the construction sector. That is a big concern for the RBNZ, because if demand is running hot, inflation is likely to remain elevated even when the current pressure on operating costs (eventually) eases off. And a key factor underpinning the strength of household demand has been stimulus from low interest rates.
Looking across the broad product groups, imported prices (sometimes referred to as tradables) rose by 1.9% over the past three months, and are up 8.7% over the past year. While much of that was due to fuel costs, other tradable prices are up 5.4% over the past 12 months. Notably, the June quarter saw larger than expected increases in the prices of a range of durables and semi-durable retail items like furnishings which tend to be imported.
Domestic (or non-tradable) prices were up 1.4% in the June quarter and have risen by 6.3% over the past year. That is the fastest annual pace of non-tradables inflation since records began in 2000. The RBNZ pays particular attention to non-tradables inflation, and it is currently running at around twice the pace we’ve seen over the past two decades.
With widespread pressure on operating costs, we expect that inflation will remain elevated over the remainder of this year. In fact, we aren’t forecasting a return back within the RBNZ’s target band until the middle of next year at the earliest. That signals an ongoing squeeze on households’ purchasing power.
What does today’s result mean for the RBNZ?
Today’s result was stronger than the RBNZ’s latest published forecast for a 1.4% rise. However, since that number was published, the RBNZ had noted the upside risk for prices.
Last week, when delivering its third consecutive 50bp hike, the RBNZ reaffirmed that they are planning to continue raising the cash rate to a level where they are confident that inflation will settle within the 1% to 3% target range. And with price pressures continuing to sizzle, there was nothing in today’s report to dissuade them from that course.
Given the continuing and widespread strength in inflation pressures, we’re forecasting the RBNZ will deliver a fourth 50bp hike at the time of the August policy review. We expect that to be followed by 25bp hikes in both October and November, taking the OCR to a level of 3.50% by year’s end.
Details
While strength in price pressures has been widespread, the June quarter saw particularly large price increases in a number of areas.
The biggest contributor to the strong June quarter inflation result was a further large increase in building costs. The cost of purchasing a newly built home rose by 4.5% in the June quarter. That followed similarly large increases in recent months, with construction costs up a massive 18% over the past year. Building activity has been charging higher over the past year. At the same time, acute shortages of materials and staff have seen input costs climbing rapidly.
Adding to the pressure on housing costs, rents have been rising rapidly, with an increase of 1.2% in the June quarter. The annual increase in rents of 4.3% was the largest increase since records began.
The past three months also saw a chunky 1.3% increase in food prices. That includes sizeable increases in the prices for groceries and fresh vegetables.
Fuel prices have also risen strongly, increasing by 6.2% over the past three months. Despite the 25 cent reduction in the petrol excise tax, prices across the country hit record levels in recent months. That’s flowed through to consumers wallets, and the related increases in transport and production costs have added to the prices for all manner of goods and services.
Providing some offset to the above price increases were the reduction in road user charges and the halving of public transport fares that the Government introduced earlier this year.
