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Summary
- Inflation more than forecast as announced in the latest numbers.
- Mainly driven by oil price hikes and new houses’ building costs.
- The demand for interest rate hike next month gets stronger.
Inflation numbers released by Stats NZ on Friday showed a more-than-expected rise in inflation. The consumer Price Index (CPI) rose to 3.3%, whereas the analysts had forecast it to be anywhere between 2.7% to 3% for the quarter ended on 30 June.
Inflation due to external factors like crude price increase
The inflation this time around is driven mainly by a rise in crude prices by almost 16% on an annual basis and housing prices for new houses.
Also Read: Done with recession? What are the different kinds of economic recoveries?
A more-than-expected rise has further strengthened the demand for a hike in OCR rates by the Reserve Bank of New Zealand (RBNZ) by August.
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All the four major banks had pushed forward their demand for an interest rate hike in August after the Monetary Policy statement, which signaled that the New Zealand economy was performing better than expected and started withdrawing the stimulatory part of the monetary policy by putting a halt on the quantitative easing.
The inflation figures released today have made that demand stronger and left no room for doubt that RBNZ should start raising the OCR by August.
Also Read: RBNZ keeps OCR unchanged but ends quantitative easing
Biggest rise in a decade
According to analysts, this has been the biggest rise in last few years. Historically, inflation saw this peak only after it had reached 5.3 % in June 2011, reflecting the impact of GST which came into effect in NZ in 2010. And before that, a 5.1% inflation was seen in the third quarter of 2008 following the global financial crisis driven by the crash of the biggest banks in the US.
Cumulative inflation for the year is expected to be in the range of 2.6% and 3%, but the economists are also waiting and watching to see whether this inflation is short lived as driven by imported factors like crude oil price hike or is long term. The central bank had indicated that it was likely to be short lived. However, if short-lived, it is not a cause for worry, but if stays for longer, then it will translate into higher wages to beat the inflationary trend.
Also Read: Will NZ households pay extra for consumer items amid growing inflationary burden?
Cost of building houses & rentals also reason for high inflation
According to Stats NZ, after the oil price hikes, the other biggest contributor to the quarterly and the annual inflation has been the increasing cost of building new houses. Although CPI does not include house price inflation, it does include the cost of building new houses and rental costs of houses.
Also Read: New Zealand manufacturing on a slow but steady growth path
So the cost of building new houses moved up by 4.6% in the last quarter and 7.4 % during the year, according to Stats NZ. This reflects that the increase in demand for new housing and supply are not being able to meet the demand.
Other reasons for the increase in CPI are transport costs, which increased by 9.4%, the price of household utilities, which rose by 3.9%, restaurant and ready-to-eat meals prices, which rose by 4.3%, and other hospitality costs, which also showed a marked increase.
