Peter Nicholl
There has been some good news on inflation from overseas in the last two weeks.
In the United Kingdom annual inflation was 4.5 per cent for the year to October 2023, a big fall from the September figure of 6.3 per cent. In the United States the annual inflation rate for the October year was even lower at 3.2 per cent. A sharp fall in fuel prices contributed to the slowdown in inflation in both countries.
Share prices rose strongly in both countries after the positive inflation news came out. Investors were willing to bet that the US and UK central banks would not be raising interest rates further. So did the New Zealand share-market rise, even before additional inflation data came out here. New Zealand investors obviously believed the positive inflation picture emerging overseas would also be seen here. They are probably right. In the past, we would have had to wait until late January or early February to be sure as New Zealand is one of only two countries in the OECD (38 countries) that does not produce the official consumer price index monthly – the other is Australia.
It is not clear to me why New Zealand cannot do it when almost all other countries can. On November 14 the Department of Statistics went part of the way to plugging this significant data gap. They released for the first time monthly data called ‘Selected Price Movements’. It included food, rent, alcohol and tobacco, petrol and diesel, airfare and accommodation prices. These items represent almost half of the CPI so they will give a good steer on the likely future movement in the CPI. This is a big improvement.
What did these selected price movements show? The annual price movements still looked high for most items. For example, food prices were 6.3 per cent higher and petrol prices 13.6 per cent higher than a year earlier. But the monthly data showed a much more favourable picture. In the month of October, food prices fell 0.9 per cent, petrol prices fell 1.1 per cent, domestic airfares fell 9.4 per cent, and international airfares fell 7.5 per cent. This shows the importance of having monthly data as it picks up changes in price pressures much more quickly.
This new monthly price data will be very helpful for the Reserve Bank in taking monetary policy decisions and for anybody who tries to predict future movements in interest rates. Until recently, there were a few commentators who had still been suggesting the bank would increase the official cash rate one more time this year.
But they have all changed their minds since the overseas inflation data came out. This doesn’t mean there won’t be future interest rate increases for many people. There are still many mortgages and other financial contracts to be rolled over and interest rates on the new contracts will be higher.
We can see that in my previous column on the Waipa District Council. At end June 2023 the average interest rate on their borrowings was only 2.46 per cent. That is a long way from the interest rate they will have to pay on new debt or roll-over debt. The actions the Reserve Bank has already taken are still working their way through the economy. The impact lags from monetary policy are long.
