Inflation expected to hit fastest rate in decade

Inflation data due this Friday will likely show prices now rising at the fastest pace in a decade.

Economists expect the Consumer Price Index for the June Quarter – due from StatsNZ -to reflect anecdotal evidence that the pandemic is pushing prices ups.

Inflation is likely to have popped to 3 per cent (year on year), KiwiBank economist Jarrod Kerr writes in his latest economic outlook.

Transport is set to be a big driver for the quarterly rise in prices, Kerr says.

“Global supply-chain disruptions, caused by the pandemic, have led to rising shipping costs and firms are reporting considerable delays in sourcing materials.”

Meanwhile global demand was recovering with commodity prices powering ahead.

Global oil prices especially have been on the rise, recently hitting a six-year high, he said.

“The June quarter will see petrol prices caught up in the uptrend. And a rise in petrol prices will be sharp turnaround from the 12 per cent drop we saw last June quarter”.

The rampant housing market would also be a source of inflationary

House prices from the residential sales market are not included in the Consumer Price Index but the cost of building and rents are.

“Rising raw material costs and capacity constraints will boost home building cost inflation,” Kerr said. “Rents may also post a lift in the quarter, as the increased costs due to the Government’s decision to remove interest deductibility on investment property are passed on”.

ASB economists have 2.8 per cent annual inflation pencilled in for Friday, ahead of the broader market expectation of 2.7 per cent.

Inflation is key to the outlook for the economy because if it rises above the Reserve Bank’s target band of 1-3 per cent then interest rats are expected to rise.

The Reserve Bank also delivers a review of the Official Cash Rate on Wednesday.

It is expected to leave the rate unchanged and has said it will look through temporary spikes in inflation caused by pandemic constraints.

But if Friday’s CPI inflation figure comes in above 3 per cent then it will face more pressure to move.

The RBNZ’s current rate track suggest the first hike will be inthe middle of next year but rising inflation expectations have the market economists tipping a move by November.

A strong headline inflation result should not necessarily be viewed as the trigger to OCR hikes, said BNZ head of research Stephen Toplis.

For a start, we note the RBNZ, in its”May MPS, already forecast an annual outcome of 2.6 per cent, based off a quarterly result of 0.6 per cent.”

At issue would be the extent to which the rise is seen as transitory, he said.

Adding to the evidence for the strength of the economy, new electronic card data showed retail spending rose by 0.9 per cent in June.

“That was stronger than the 0.2 per cent gain we expected,” said Westpac senior economist Satish Ranchhod.

June’s increase added to the picture of strong demand through the middle part of the year, he said.

“In fact, looking at the June quarter as a whole, retail spending levels are up a stonking 5.7 per cent”.

It also added to the picture of strength in economic activity ahead of Wednesday’s RBNZ policy announcement.

“We expect this week’s announcement will see a shift in the RBNZ’s policy outlook, with the central bank to set the stage for earlier interest rate increases than had previously been expected,” Ranchhod said.

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