New Zealand inflation nears record high as wisdom of rate hikes questioned

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New Zealand’s latest inflation data defied widespread predictions that it would fall on Tuesday as it barely budged from a 30-year high, sparking alarm among economists and raising new questions about the effectiveness of rate hikes. of interest.

Prices rose 2.2% in the latest quarter, bringing annual inflation to 7.2%, just below the 7.3% recorded at the end of June.

The Reserve Bank had forecast inflation to fall to 6.4% in the latest quarter, while economists at major banks anticipated it to fall to between 6.5% and 6.9%.

The main drivers of inflation were food, housing and domestic services, and transportation. The cost of vegetables reached its highest level in 23 years. The data showed that domestic (non-tradables) inflation had risen, while imported (tradables) inflation had started to slide lower.

Finance Minister Grant Robertson blamed the persistently high figures on a volatile international environment and said the government “will continue to carefully target spending”, while the National Party criticized the figures as “a mockery of Labor claims of a strong economy. .

Kiwibank senior economist Jarrod Kerr said the gap between the predictions and the actual figure on Tuesday was “alarming”.

“The report was shocking, to put it politely,” Kerr said, adding that both global and domestic inflation were much stronger than anticipated. Economists had predicted that transportation costs would reduce inflation due to falling gasoline prices, but an unexpected 20% increase in international air fares stymied that.

New Zealand’s central bank was one of the first in the world to target inflation and price stability with interest rate hikes, Kerr said, adding they were “far from it at the moment.”

“The failure of his mandate will only strengthen his resolve to do more; it is quite clear that they have to walk [interest rates] more and in larger quantities,” Kerr said. “Today’s report will be like a red rag to an inflation fighting bull.”

Kiwibank predicted that the Reserve Bank would offer a “huge hike” of 75 basis points (instead of 50 bps) to the official cash rate in November, with an eventual rise to 5% in 2023. That would create more pressure for investors. homes, Kerr said.

“The person on the street is making it difficult right now and it’s a very uncomfortable prospect for the household right now. Most people are now facing much higher interest rates…higher inflation and in many parts of the world, including New Zealand, we have a falling housing market.”

The effectiveness of interest rate hikes in reducing inflation in the current global context is being questioned in countries such as the US, which also has persistently high prices and is focused on aggressive rate hikes. Some economists say this comes at the expense of dealing with other culprits of inflation, such as corporate prices, rising energy costs and supply chain disruptions.

Edward Miller, a researcher and policy analyst at First Union, warned that raising interest rates would simply put more pressure on consumers while doing little to reduce inflation.

“If inflation is being driven by oil, fertilizer and food prices due to the Russian war, then there is not much that can drive up domestic interest rates,” Miller said, adding that these price increases driven internationally they are transient.

“By raising interest rates, they are charging additional costs to New Zealand businesses, which in turn is driving up prices; in effect, they are prolonging the problem.”

Miller pointed to the cost of vegetables as an example. While it is too early to tell what has driven the latest rise in vegetable prices, one of the main drivers of inflation this quarter, Business Price Index figures for the latest quarter showed that the largest increases in spending on horticulture were gasoline and fertilizers, followed by rising interest rates. .

“All of this should underscore to the Reserve Bank that, for the most part, we are not dealing with a demand-driven inflation situation, but rather a supply-side shock, due to a combination of the invasion of Russia to Ukraine and post-Covid supply chain impacts. .”

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