Consumer prices are rising at the fastest pace since 1990, with inflation hitting 5.9 per cent at the end of 2021.
Figures from Statistics New Zealand released on Thursday show a further sharp lift in the cost of construction, petrol and rents pushed the consumer price index up 1.4 per cent in the final three months of the year.
The figures were roughly in line with expectations, with a survey of economists forecasting inflation for 2022 would be 5.8 per cent.
ANZ, New Zealand’s largest bank, has warned that the December quarter may not be the peak, with further increases possible in 2022.
At the end of September, annual inflation was running at 4.9 per cent.
While almost all of the subgroups which make up the theoretical basket of goods that Stats NZ uses to measure inflation, the biggest increase was in the household utilities group which rose by 2 per cent.
This was driven largely by the cost of construction of new dwellings, which rose 4.6 per cent. Coming on the back of similar increases in the previous two quarters, the cost of building new dwellings in New Zealand was 16 per cent higher in 2021 than 2020.
Transport was the second biggest contributor to inflation at the end of 2021, boosted by record petrol prices. Statistics New Zealand said during last year the average price of 91 octane petrol rose 30 per cent, from $1.87 per litre to $2.45.
While some of the drivers of inflation are likely one-off or transitory, high inflation can become self-fulfilling, as workers and businesses seek to recoup the loses by demanding wage increases or passing on higher prices.
Economists have warned that the high cost of fuel in particular is likely to push prices up generally, as businesses seek to recoup lost margins from rising transport costs.
Westpac said New Zealand faced a “potent cocktail of supply chain pressures and firm domestic demand” which had raised the core measures of inflation to elevated levels, meaning cost increases could persist.
“This underlying strength in pricing pressures indicates that inflation is likely to remain elevated for at least the next year,” Westpacsenior economist Satish Ranchhod said.
Although many of the pressures for higher prices are coming from offshore, Thursday’s figures also show that New Zealand’s economy is now generating significant domestic inflation.
Non-tradable inflation, which roughly means domestic inflation, hit 5.3 per cent in 2021, Statistics New Zealand said, driven by construction, rental and rates.
“Inflation isn’t an offshore problem that New Zealand is caught up in,” Infometrics economist Brad Olsen said.
“There are real and intense pressures throughout the New Zealand economy which are seeing supply unable to match the demand for goods and services.”
Nevertheless, Prime Minister Jacinda Ardern told reporters that the problems were largely due to offshore factors.
“New Zealand is alongside every other country that is experiencing this problem of … high crude oil prices,” she said.
National’s finance spokesman Simon Bridges said the government needed to rein in spending to prevent further stoking prices which he said were “a thief in New Zealanders’ pockets”.
The inflation data is important because it affects how quickly the Reserve Bank of New Zealand could increase the official cash rate (OCR).
The Reserve Bank has a mandate to keep inflation between a band of 1 per cent to 3 per cent.
Already the central bank has begun raising the OCR in a bid to cool the economy, with small hikes in October and November taking the cash rate to 0.75 per cent.
That has already had a flow on affect to borrowing rates which have risen sharply since June in anticipation of increases to the cash rate. Economists say that more is needed, however, even though the housing market is showing signs of cooling.
ANZ last week said it expected the OCR to be lifted in steady 25 basis point steps to a peak of 3 per cent by April 2023, having previously a forecast peak of 2 per cent.
That saw wholesale interest rates spike. By Friday the two-year swap rate was at 2.34 per cent – up 15 basis points over the week.
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