Inflation is set to hit its highest level in two years, driven by the spike in fuel prices caused by the Middle East war, backing the prospect of more interest rate hikes by the Reserve Bank (RBNZ).
Economists are expecting the annual rate to touch at least 4 percent in the 12 months ended June from 3.1 percent in the March quarter, while the RBNZ has estimated a 3.9 percent reading, which it recently said was likely to be the peak in the current cycle. Westpac senior economist Satish Ranchhod is at the top end of the forecast range with annual inflation lifting to 4.1 percent, which he said - given the flare up of hostilities and uncertainty - would not faze the RBNZ.
"The underlying detail will be a key interest. The RBNZ will be watching closely for signs that high fuel prices are spilling over into other prices, especially with global oil prices taking another step higher recently. The strength of the various core inflation measures will be a key focus for the RBNZ."
He said core inflation had been softening but remained above the RBNZ's 2 percent mid-point, and while the RBNZ looked through the volatile quarterly swings, households were still facing higher fuel, electricity and gas, and food prices.
Sticky inflation pressures a worry
ANZ senior economist Miles Workman said the big worry was the higher fuel costs will drive broader price rises.
"For the Monetary Policy Committee... it is the risk that higher fuel prices spill over into other parts of the CPI basket, lifting inflation expectations and generating a broader inflation impulse that proves difficult to contain."
The NZ Institute of Economic Research's recent quarterly survey of business opinion that inflation pressures had become stronger, with more than half of the firms surveyed having to pay higher costs and and expecting to raise their own prices in response.
RBNZ chief economist Paul Conway recently unveiled research showing firms have been quicker to raise prices during periods of high inflation and slow to cut them when costs fall.
ASB senior economist Mark Smith said the official cash rate (OCR), despite the recent rise, was still stimulating the economy and the RBNZ wanted to gradually reduce that stimulus - taking the foot off the accelerator - which would dictate the pace and extent of further rate hikes.
"If inflationary pressures prove to be more benign, we could see a more gradual path of hikes and a lower OCR peak. If not, the risk is that the RBNZ may have to use the brake pedal and push the OCR somewhat above 3.25 percent if inflation remains stubbornly high."
In my opinion, the current inflation situation is a complex issue with far-reaching implications. The Middle East war has caused a significant spike in fuel prices, which is a major driver of inflation. However, the RBNZ's response is crucial. While the central bank is monitoring the situation closely, the risk of sticky inflation pressures is a concern. The economy is still being stimulated by the OCR, and the RBNZ's gradual reduction of this stimulus will be a key factor in managing inflation. The potential for broader price rises and the impact on households is a critical aspect that needs to be carefully considered. The RBNZ's research on firms' pricing behavior during high inflation periods is also insightful, highlighting the need for a nuanced approach to monetary policy. Overall, the inflation outlook is uncertain, and the RBNZ's decisions will play a pivotal role in shaping the economic landscape.
