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Highlights
- Annual inflation is higher in New Zealand as compared to Australia
- Prices are rising in Australia significantly of late
- A wide gap between central banks’ monetary policy responses
Annual inflation in the year to the March quarter is higher in New Zealand, at 6.9%, than in Australia, where annual inflation over the same period reached 5.1%.
Even though prices in Australia have been growing significantly in the first three months of 2022, in New Zealand, annual inflation is much higher than in Australia.
Annual inflation in Australia was up from 3.5% in the December quarter, ahead of market expectations, whereas the jump in annual inflation from 5.9% to 6.9% in the most recent quarter in New Zealand was a little below market forecasts.
Also Read: Does Budget 2022 address cost-of-living crisis in NZ?
Related Read: What is wage inflation and how is it different from consumer price inflation?
Like in New Zealand, rises in house prices and petrol prices were the biggest contributors to the price rises. In New Zealand, annual inflation stands at a 30-year high, and in Australia, it is at a 20 -year high.
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Why is inflation higher in NZ?
As a general principle, inflation can be explained by the demand-and-supply lag when the demand is high, and the supply could not match it. In New Zealand, which is a relatively smaller economy, there was more demand and lesser supply. The initial phase of quantitative easing led to a huge money supply in most countries. This put a lot of money in hands of consumers, but the supply could not be matched with the demand.
While quantitative easing saw a total of NZ$54 billion into the financial market, the productivity was low due to the COVID-19 pandemic and Russia’s invasion of Ukraine. New Zealand has not been able to produce more goods and services to match the demand. More money in hands of consumers and fewer goods and services lead to inflation. When there is a good balance between demand and supply, inflation remains under check.
Central Banks’ responses
Central Banks’ responses in New Zealand and Australia have also been very different. NZ had higher inflation prior to the pandemic. So, NZ went with a higher trajectory than Australia did.
Also Read: Kiwis gear up for more mortgage rates as RBNZ raises OCR
While the Reserve Bank of New Zealand (RBNZ) has been very hawkish in its monetary policy stance, the Reserve Bank of Australia (RBA) has moved very slowly. New Zealand’s central bank just hiked the OCR by double digits or 50 bps to 2%. This was the second time in a row that the OCR was given a double-digit push.
Economists in Australia are also predicting that annual inflation would top 6% in Australia before beginning to taper off. This prompted Australia’s Reserve Bank to hike its official cash rate by 50 basis points to 0.85%, ahead of the 25bp to 40bp increase expected by most economists. Central banks around the world are pushing interest rates higher, removing pandemic stimulus as they try to stem rampant inflation.
At the end of the day, economists say that while the RBA is late, the RBNZ is going too fast.
