The stats department released the Consumers’ Price Index (CPI) for the year to March 31 on April 17 and it was initially viewed positively.
The CPI grew by four per cent compared with 4.7 per cent for the year to December 31, 2023.
Peter Nicholl
The share market briefly rose on the expectation that the Reserve Bank would start lowering its Official Cash Rate later this year, possibly as early as August.
But as people looked more deeply into the number, the views became more pessimistic. The CPI is divided into two broad segments called tradeable and non-tradeable inflation. In simple terms, tradeable inflation is what we import from the rest of the world and non-tradeable inflation is what we generate ourselves.
The two facts that caused concern are, first, that the domestic element of the March CPI at 5.8 per cent was much higher than the imported element at 1.6 per cent.
Most of the inflation we are now facing is home-grown. Second, while the imported element was continuing to fall in a comforting fashion, from three per cent in the year to December 2023 to just 1.6% in the year to March 2024, domestically-induced inflation had scarcely budged. It had been 5.9 per cent in December and was 5.8 per cent in March. That’s running at a rate that still almost double the top of the Reserve Bank’s 1-3 per cent target.
When the bank decided to keep their cash rate unchanged at 5.5 per cent on April 10 they said in their press release that they were ‘confident’ that maintaining the rate at its current level for a sustained period would return consumer price inflation to within the 1-3 per cent target range this calendar year. As I read the rest of their press release of April 17, I couldn’t understand where their came from.
The following are a list of the possible setbacks for this I found in the bank’s press statement:
- there are some substantial increases in prices for rates, insurance and utilities in the near-term pipeline
- continued strength in net migration is leading to rising dwelling costs
- oil prices are rising and so are global supply contract prices
- growth in unit labour costs remains elevated
- inflation expectations are still elevated in New Zealand
- near-term business pricing intentions remain elevated.
In the days following the NZ March CPI announcement the international news on inflation also became bleaker. Tension in the Middle East pushed oil prices up further. The US Federal Reserve poured cold water on the global financial market expectation that they would soon be lowering their official interest rate.
Central banks pulled the inflation genie out of the bottle where it had lain quietly for 30 years with their extraordinarily lax monetary policies a few years ago. They thought it would be easy to get the inflation genie back in the bottle again when the time came. The time has come. It’s going to be a lot harder than they thought.
We will all pay a big price for the central banks letting inflation return in the first place – and my words are deliberate, central banks are responsible for letting inflation return.
