New Zealand will see its highest rate of inflation for a generation when new official figures are released in the coming week.
Most economists expect that the Consumers Price Index to be announced by Statistics New Zealand on Tuesday, will show annual inflation hitting 5 percent for the first time since 1990. But this is expected to be the peak.
Average expectations are for 1.5 percent inflation in the September quarter and an annual rate of 5.1 percent.
The latest release will be the first one since Statistics New Zealand made changes to the composition of the CPI in order to accommodate changing spending habits. Goods added to the CPI “basket”, include heat pumps, cut flowers, car satellite navigation systems, free-to-air digital television receivers and digital music downloads.
Services that will now be measured in the index include lawn mowing, house cleaning and auctions - with the latter reflecting the popularity of online trading.
The main contributors to the increased inflation are expected to be soaring food prices and rampant fuel bills. Power prices and local government charges are also expected to weigh in.
Under normal circumstances the Reserve Bank - which itself is forecasting 4.9 percent inflation - would be hugely concerned. It is charged with keeping inflation in a 1 percent to 3 percent range.
But such has been the global turmoil in recent times that for once rising prices are very much a lesser concern.
The RBNZ is expected to not worry about any immediate implications of the high inflation and again aggressively lower official interest rates in its next review - which is on Thursday.
Our central bank has already taken official rates down from 8.25 percent to 7.5 percent since late July. Most economists now think it will lower the rates by a further 0.75 of a percentage point next week - and possibly be a full percentage point, perhaps to 6.5 percent.
The New Zealand economy is already in recession. The latest NZ Institute of Economic Research business opinion survey suggested that the recession may continue into the December quarter, meaning we will have had four consecutive quarters of a shrinking economy.
There is now a growing school of thought that the economy may dip in and out of recession for the whole of next year as well, before starting to recover again.
Given such a gloomy outlook the expectation is that inflationary pressures will recede rapidly in the coming months - with the possibility that the country might even see deflation in future.
ANZ senior markets economist Khoon Goh said the rapidly deteriorating global backdrop and weakening domestic picture (notably demand for labour) was now dominating the immediate outlook.
“. . .The stark reality is that financial stability and the flow-on effect from falling asset prices and global ructions should now dominate the RBNZ’s reaction,” he said.
Westpac chief economist Brendan O’Donovan said the re-weighting of the CPI by Statistics New Zealand was expected to have little impact on the new inflation figures, though over time it might see inflation come out lower than under the old measurement. Increased weightings given to housing and fuel prices would be the main reason for this as prices of both were now falling.
O’Donovan too said that inflation concerns were now rapidly receding - despite the fact next week’s figure will be high.
“Retreating petrol prices will see headline inflation peel back over the coming 12 months. More fundamentally, a worsening economic outlook as the international credit crunch bites will see the previous capacity constraints relax. The RBNZ will remain focused on finance and economic stability over coming months - with current inflation taking a backseat,” he said.
Related Posts: