New Zealand Inflation Hits 7.3 Percent, Highest in 32 Years

Annual inflation in New Zealand has hit a 32-year high at 7.3 percent. Viki Mohamad/Unsplash

New Zealand’s (NZ) annual inflation accelerated to 7.3 percent in June, reaching a new 32-year high and surpassing market expectations.

According to Stats NZ, the increase was led by housing costs, with an 18 percent jump in construction prices and a 4.3 percent increase in rentals for housing.

“Supply chain issues, labour costs, and higher demand have continued to push up the cost of building a new house,” Stats NZ general manager Jason Attewell said.

The next largest contributor was transport costs due to petrol and diesel. Petrol rose 32 percent in the year to the June quarter and diesel prices increased 74 percent over the same period.

The same factors drove the consumer price index up 1.7 percent across the June quarter.

Compared to the March quarter, construction prices rose 4.5 percent, while housing rents rose 1.2 percent in the June quarter.

The average price for one litre of 91 unleaded petrol also rose 6.3 percent, or 17 cents, in the three months to June.

However, the 25 cents fuel excise reduction, which came into effect in March, does not apply to diesel.

“The average price of one litre of diesel rose 30 percent to $2.57 (US$1.58) this quarter, compared with $1.98 in the March quarter,” Attewell said.

Stats NZ also revealed that the annual tradeable inflation rate, a measure of goods and services influenced by foreign markets, was 8.7 percent.

Meanwhile, domestic inflation, or non-tradeable inflation, was 6.3 percent over the year to the June quarter.

The increases for both tradeable and non-tradeable were the largest since Stats NZ began tracking the data in 2000.

Finance Minister Says New Zealand ‘Well Positioned’

The annual inflation figure far surpassed the Reserve Bank of New Zealand’s (RBNZ) expectation of seven percent and market predictions of 7.1 percent.

Finance Minister Grant Robertson said it reflected the volatile and uncertain global environment, with other nations like the United Kingdom and United States also experiencing 40-year high inflation numbers.

“We recognise that this is a tough time for New Zealanders and the rise in the cost of living is making it hard for many,” he said in a release.

Finance Minister Grant Robertson during his press conference after it was announced the country will move to red traffic light settings, at the Beehive in Wellington, New Zealand, on Jan. 23, 2022. Mark Mitchell-Pool/Getty Images

Robertson said New Zealand was “well positioned” to respond to inflation pressures with record low unemployment and comparably low debt levels.

“There are no simple fixes in the face of global inflation and its impact here in New Zealand,” he said.

“Most economists believe that this level of inflation represents the peak of this cycle. And this quarter has seen a lower rate than the previous quarter.

“However, inflation will remain elevated for some time at levels above what has been experienced in recent times.”

National’s finance spokesman Nicola Willis said the government needed to make urgent changes as more spending and temporary measures wouldn’t cut it.

“Spending billions to fight runaway inflation just puts more fuel on the fire, pushing up inflation and interest rates,” she said.

Implications on Cash Rate

Chief economist for New Zealand at ANZ Bank, Sharon Zollner, said the data represented a “significant starting point surprise” for the Reserve Bank.

“While it is our expectation that signs of softening domestic demand will become increasingly evident over the second half of this year, the RBNZ has more work to do,” she said.

As a result, Zollner expects the RBNZ to continue with another three 50 basis point cash rate hikes, bringing the peak to four percent in 2022.

She also noted that upcoming labour market data, to be published on Aug. 3, could also influence the central bank to frontload cash rate hikes with a 75 basis point increase in August.

“The real challenge for the RBNZ is how broad-based and persistent inflation is looking, rather than the headline number itself,” Zollner said. “Tradables inflation could fall away quite quickly ... But non-tradable inflation is likely to stay high over 2022 and into 2023 as an increasingly tight labour market generates strong wage rises.”

However, Westpac NZ have a more modest outlook and believe the RBNZ will stick to its original projection, with the cash rate ending the year at 3.5 percent.