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Inflation on more rapid downward trend, BNZ economist says

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Inflation on more rapid downward trend, BNZ economist says

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Woman checking the grocery receipt using her smartphone

Last year’s bad weather events led to soaring prices for food, in turn fuelling inflation but their impact was starting to wear off, an economist says.
Photo: 123RF

The rate of inflation is rapidly declining, but factors like bad weather and high insurance costs will continue to be a stress point, an economist says.

Inflation numbers due out this morning are expected to show price rises at their lowest level in more than two years.

It is anticipated lower-cost fuel, food and airfares are driving the slowdown, but high domestic prices for such things as rents, rates and energy prices are limiting it.

Economists expect a rise of 0.5 percent for the three months ended December, bringing the annual rate down to 4.7 percent from 5.6 percent.

BNZ economist and head of research Stephen Toplis agreed with the 4.7 prediction for the year’s inflation rate.

He said inflation was starting to decline at a much more rapid rate “and it won’t be too long before we have a number with a three in front of it”.

He said it might even be down to a two by year’s end.

Toplis said major factors influencing the trend included that during the pandemic the economy suffered from “massive cost imposts” including difficulty with moving goods and other structural issues.

“And they’ve unwound so we’ve got rid of all those big pressures.”

As well, the country had suffered from a run of adverse weather events last year that had led to high food prices and they were starting to unwind.

While the economy was “going sideways at best” and was possibly in recession, that also removed price pressures.

“So all those things are coming to pass at once.”

However, he believed the Reserve Bank would have to wait and see before having the confidence to cut interest rates.

“So I suspect that by the end of this year that you’ll have seen at least one interest rate cut.”

Domestic inflation remained “sticky” with one major reason being higher insurance costs.

Home and contents insurance costs were up by over 20 percent while vehicle insurance had risen around 16 percent.

“All of those things are related to perceived risks about New Zealand in part to do with climate change.”

Asked about the coalition government’s promises to cut state spending and how that would impact on the inflation rate, he said it would be a factor because it would reduce demand and put the economy into “a softer state”.

However, it would not get rid of other things affecting inflation such as rates, rents, and bad weather.

He did not expect the Reserve Bank’s planned changes to debt to income ratios to play a part because the parameters had been set at a high level and would only kick in if there was another housing boom.

“They will be interesting in time but in terms of what we’re forecasting for the next couple of years – very little difference.”

Net migration inflows were at a 76-year high putting massive pressure on housing but they had not so far led to soaring prices showing “how soft the underbelly for the New Zealand economy is”.

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