The CPI outcome for the year to September 30 was a good one.
The increase of 2.2 per cent was at the lower end of most economists’ expectations. It was also the first time since 2021 that the outcome was within the Reserve Bank’s target range – 1-3 per cent. The bank had anticipated this outcome and had lowered the Official Cash Rate (OCR) by 50 basis points in the week before the September CPI announcement, which took the OCR to 4.75%.
Peter Nicholl
The good news on inflation was greeted with both relief and celebration. The relief was understandable. But some of the celebration was a bit over-enthusiastic. One newspaper column I read opened by saying ‘inflation in NZ is now officially dead’.
You only need to take a cursory look over history to realise that inflation never dies. It does sometimes go into hibernation and the hibernation periods can last several years. But just like hibernating animals, when conditions become suitable, it can easily spring back to life again.
The current battle against inflation is almost won. But fighting inflation Is not a single battle, it is an on-going war. Central Banks made huge mistakes with their excessively easy monetary policies of very low interest rates and huge liquidity injections. They were the ones that largely caused the inflation battle they have all been fighting over the last few years. What Central Banks do now that inflation is back within their target ranges will be critical for making sure that inflation stays in hibernation.
Interest rates in New Zealand are clearly on the way down. The fact that bank mortgage rate yield curves are still inverse (3 and 4-year fixed interest rates are lower than six month and one year rates) indicates that banks – and their customers – expect them to continue to fall. After the announcement that the annual CPI rate was 2.2%, some people started calling for the Reserve Bank to accelerate the downward path by moving their OCR down by 75 basis points when they make their next OCR decision on 27 November.
In my view, that would be a mistake. The bank should stick to moving the OCR down by 50 basis points in November. I said earlier in the column that the current battle against inflation is ‘almost won’. The ‘almost’ caveat applies especially to New Zealand. Most of the downward move in our inflation rate from 3.3 per cent in the year to June to 2.2 per cent in the year to September was due to events elsewhere in the world. Tradeable inflation, which measures price changes in goods and services that are influenced by foreign markets, was actually negative. It fell by 1.6 per cent in the year to September.
Non-tradeable inflation, which is the inflation we are producing within NZ, is coming down but it is coming down slowly and it is still high. It was 5.8 per cent in the year to March, 5.4 per cent in the year to June and was still at 4.9 per cent in the year to September. This should worry the Reserve Bank. It should result in them not accelerating the pace of monetary easing in November.
Inflation in New Zealand is certainly not dead. It hasn’t even yet gone into hibernation in New Zealand.
