Brad Olsen, principal economist at Infometrics, told Morning Report on Friday their modelling is pointing to inflation staying stubbornly high. Photo:
Dropping inflation rates in our major trading partners should not be seen as a guarantee ours will start falling too, a prominent economist is warning.
New figures from Statistics NZ, released Thursday, showed food price inflation at its highest in nearly 33 years - up 11.3 percent on a year ago.
While the US and [https://www.theguardian.com/business/2023/jan/18/uk-inflation-dips-people-continue-to-feel-pinch UK are experiencing similar hikes in the cost of food, overall inflation rates in both economies appear to be easing.
The US figure has dropped from a decade-high in June of 9.5 percent to 6.5 percent in December, while the UK has seen its second consecutive monthly drop in its consumer price index, falling from 11.1 percent in October to 10.5 percent in December.
Infometrics principal economist Brad Olsen told Morning Report on Friday their modelling is pointing to inflation staying stubbornly high, by recent historical standards.
"Infometrics is now expecting that inflation will remain flat on an annual basis at 7.2 percent per annum - that would be a further 1.4 percent increase quarter on quarter.
"So there's still a lot of pressure in the system. Remember that anything more than 0.5 percent increase quarter on quarter means that you're well above the Reserve Bank's target."
"We're nowhere near calling the inflation battle done yet" - Infometrics principal economist Brad Olsen
The Reserve Bank's primary job is to keep inflation between 1 and 3 percent. Its latest monetary policy statement, released in November, predicts a recession "spread over several quarters", starting in 2023, with GDP contracting "about 1 percent" at its deepest.
Brad Olsen. Photo: Tom Furley
While this "will in part be a result of higher interest rates" the bank imposes, the monetary policy statement says it will also be linked to recessions in other major economies - with "significant headwinds" affecting the Chinese economy, the energy crisis in Europe thanks to Russia's invasion of Ukraine, and a reduction in consumer spending as households run out of "savings built up during Covid-19 lockdowns".
As spending drops so too should inflation, but Olsen said it might not happen as quickly here as it has overseas.
"I say that because earlier this week we saw from NZIER's quarterly survey of business opinion that businesses are still expecting very high and very intense levels of not only cost increases to their own businesses, but also a need and an expectation that businesses continue to raise prices…
"For the decade or so after the global financial crisis, businesses were very reluctant to put up prices because they knew they'd lose market share. Whereas at the moment, there is a change in that dynamic where businesses are going, 'Well, my costs are still increasing… We've got to pass that on or we might go out of business.'"
Olsen pointed to Australia, where inflation is about the same as it is here - and at the last measure, for the third quarter of 2022, was still rising.
"I'm still of the view that at the moment, looking at talking to businesses, seeing all the numbers come through, there's no evidence so far that inflation in New Zealand is going to peak and roll over quickly.
"And more importantly, it might well take a recession to remove a whole percentage point of economic activity before that comes back…
"We're nowhere near calling the inflation battle done yet."