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New Zealand inflation rate: Price rises continue to outpace expectations, stoking fears of sharp RBNZ hike

By Ryan Hogg

Edited by Jekaterina Drozdovica

15:49, 17 November 2022

Reserve Bank of New Zealand building
When will the New Zealand inflation rate begin to come down? – Photo: Shutterstock, Jon Lyall

The inflation rate in New Zealand continues to confound policymakers, as interest rate hikes barely move the dial on price rises that have exceeded 7% for the last two quarters.

And while prices look like they will start to ease next year, in the short term there is still likely to be a lot of pain from pressures at home and abroad.

What is inflation and how is it measured in New Zealand?

Inflation measures the pace of price increases for a basket of goods and services, usually measured over a one-year period. The basket represents a weighted average based on the items most commonly bought by households.

It is one of the most important economic indicators followed by policymakers, given its instant effect on consumers and businesses, who are typically unable to adjust to the pace of excessive inflation.

High levels of inflation can be pervasive. It can quickly become endemic in an economy, with additional input costs forcing prices up for goods and services, while consumers begin to have high inflation expectations ingrained in their outlook, increasing demand. It can also outpace any rise in household incomes, amounting to a real-term pay cut.

While a lot of banks deliver inflation readings on a monthly basis, StatsNZ delivers inflation figures on a quarterly basis, using the consumer prices index (CPI). 

The New Zealand inflation rate is used as a guide by the country’s central bank, the Royal Bank of New Zealand (RBNZ) to decide monetary policy. It has a 2% target for inflation, and generally tries to keep CPI between 1% and 3%. High levels of inflation accordingly force up interest rates, increasing the risk of a recession

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Brief history of inflation in New Zealand

Over the past decade, the New Zealand inflation rate history has largely followed the same path as other Western economies, marked by extended periods of slow and relatively stable inflation within the central bank’s target range. Throughout Covid-19, prices stayed down in part as a result of low oil prices as restrictions brought several industries to a halt. 

The inflation rate in New Zealand has been above the central bank’s target range since the second quarter of 2021, when CPI hit 3.3%. It has continued to grow, reaching a peak of 7.3% a year later in Q2 of 2022.

New Zealand's inflation rate

The latest reading for the third quarter of 2022 showed the rate of price increases fell slightly to 7.2%, the first decrease since inflationary pressures began to take hold last year. Among the drivers of the increase was food, with Stas NZ’s prices senior manager Nicola Growden saying vegetable prices saw their largest quarterly rise since 1999.

What is driving inflation in New Zealand right now?

There are several factors driving New Zealand’s inflation rate, but it's hard to look past international factors as a key catalyst.

Prices began to tick up last year as supply chain crunches began to become apparent as restrictions linked to Covid began to lift. Coupled with Russia’s invasion of Ukraine, which instigated sanctions and a jump in energy prices, input costs across the global supply chain became elevated. 

In its latest economic outlook, New Zealand bank ANZ blamed the current spate of inflation on a “perfect storm” of international and domestic factors, with the supply chain crunch and Russia’s invasion of Ukraine tightening up international supply.

Domestically, a labour market crunch caused in part by closed borders and wider immigration controls, while soaring house prices also put the crunch on prices. The bank wrote:


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“All up, it’s really been a perfect storm for inflation. And one where about half of the impulse reflects global factors (tradable, aka imported inflation) and half reflects domestic factors (non-tradable inflation)...Looking forward, the global vs domestic inflation mix is expected to evolve, with high domestic inflation expected to be public enemy #1 for the RBNZ.”

The bank added that while wages and house prices were softening, tightness in the labour market may continue to push up New Zealand expected inflation:

“The baton of high inflation drivers has passed from global and pandemic-related factors to housing-related drivers, to the current wage-price spiral. Two out of three of these things now appear past their peak, but one (the too-tight labour market) may yet produce a few more positive inflation surprises before it turns.”

Inflation has forced the RBNZ to respond with a regimen of aggressive hikes to its base interest rate, the Official Cash Rate (OCR). The OCR has jumped to 3%, having begun the year at 0.75%. 

Rising interest rates will be hoped to bring down inflation by making borrowing more expensive and saving more tempting, reducing the amount of liquidity in the system as well as overall demand. ANZ said it expected a 5% OCR to be enough to drag down the current pace of price rises. To date though, the current rises haven’t immediately brought a noticeable fall in inflation.

While the pace of CPI rises fell in September, in its latest note on 14th November, the Bank of New Zealand (BNZ) said a recent survey on inflation expectations by the RBNZ, which indicated an outlook of price rises exceeding 5% next year, could pose a problem. The bank noted:

“All other things being equal, the starting point shift also means annual forecasts for the CPI will stay above the RBNZ’s original estimate for some time.This is problematic because inflation expectations are more often than not set by actual inflation. The RBNZ doesn’t like it when inflation expectations are elevated as this impacts wage and price setting behaviour. But they are, as evidenced by the recent RBNZ inflation expectations survey, and they will impact behaviours. 
“The only good news on this front is that business pricing intentions do appear to have turned the corner albeit remaining at highly elevated levels.”

New Zealand’s current spate of price rises has also been driven in part by a weakening New Zealand Dollar (NZD).

The NZD is down 12.8% against the greenback (NZD/USD) this year, as the latter was viewed as an increasingly attractive safe-haven asset amid a stock market meltdown. This drove up the price for imports to the country, which were already elevated by supply chain jams and energy price explosions, putting further pressure on inflation. 

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The NZ dollar has enjoyed a rebound in the last month, partly on the back of a slowdown in the rate of inflation in the US, which has stoked expectations that the US Federal Reserve (Fed) may not raise interest rates as quickly as anticipated.

New Zealand inflation forecast for 2023 and beyond

Among a collection of New Zealand inflation rate forecasts, experts appeared to agree that the rate of price increases will begin to soften significantly in 2023.

The BNZ saw a gradual decline in prices in its New Zealand inflation prediction, anticipating CPI to fall further to 6.6% in Q4 2022, and back down to 3.9% by Q3 2023. 

ANZ was likewise optimistic that New Zealand inflation rate will start to come down, averaging 3.6% in 2023 and 1.8% in 2024.

In August, another New Zealand bank, ASB forecast the New Zealand inflation rate in 2023 to be 4.5%, 3.1% in March 202 and 2.8% in March 2025. 

As of 17 November, Trading Economics delivered a similar forecast for New Zealand inflation of 3.5% in 2023 and 3.3% in 2024.

Final thoughts 

Note that analysts’ predictions of New Zealand inflation rate may be wrong and have been in the past. Always conduct your own due diligence before trading or investing, looking at the latest news, fundamental and technical analysis. Note that past performance does not guarantee future returns. And never trade money you cannot afford to lose.


What is the current inflation rate in New Zealand?

The current inflation rate in New Zealand was 7.2% for the third quarter of 2022.

Is inflation going up or down in New Zealand?

Inflation fell by 0.1 percentage point in the third quarter of 2022 compared with the second quarter, but the 7.2% figure still indicates inflation is rising.

Why is inflation so high right now?

Inflation is being driven up by rising energy costs and a Covid-19 linked global supply chain crunch, while domestically a tight labour market and rising house prices have helped push inflation up.

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