Source: Radio New Zealand
Infometrics says households will feel the impact of increased pricing pressures. RNZ
The Reserve Bank is set to have a battle on its hands to keep inflation under control over the next year, Infometrics says, and households will feel the biggest impact.
It has released its latest economic forecasts, which predict that rising fuel prices will drive inflation to 4.8 percent in the current quarter.
Chief forecaster Gareth Kiernan said, even with the assumption that fuel prices were able to moderate through the second half of this year, he still expected inflation to be at 3.9 percent in March next year and not return to 3 percent, the top of the Reserve Bank’s target band, until December next year.
He said he shared ANZ’s updated view that the official cash rate would need to rise three times this year starting July.
But he expected it to need to go higher – reaching 4 percent by mid-2027 and as high as 4.5 percent in the first half of 2028.
He said while he expected the increases to start in July, the possibility of a May start could not be ruled out.
Kiernan said he could understand the argument by economists such as Jarrod Kerr at Kiwibank that rates should not rise too quickly when the economy was weak.
“But to me, it would be reckless to sit on your hands for too long and wait until the evidence that inflation is going to be a problem is completely unavoidable.”
He said inflation pressure had already been “surprisingly and uncomfortably” persistent even before fuel prices rose.
“Particularly in the context of the spare capacity that had developed in the economy over the previous two years. Currently, weaker demand conditions provide no guarantee that inflation will also track lower.
“We’re seeing more of the sort of pricing pressures coming through and we think that it’ll be a bit of a repeat of what we saw through the Covid period, where businesses are more willing to pass on cost increases … even though demand is weak, firms probably don’t have a lot of wriggle room to absorb much.”
He said it was likely that households would feel the biggest impact.
“Households are probably where the brunt of the hit will be felt in terms of the economic performance this year. You’ve got higher fuel prices, then you’ve got all other goods and services potentially going up in price. The spectre of interest rates rising.
“You’ve got a labour market that we’ve sort of pushed out the timing of any improvement by six months… the risks are that that could take longer as well. Put all that together, there’s real effects among that. And then you’ve got the psychological effects and the confidence effects of it all coming at you as well. People will be more cautious in their spending.”
Kiernan said he expected household spending to grow 0.8 percent this year, two percentage points less than the pre-conflict forecasts.
Infometrics also expects gross domestic product (GDP) growth of 1.3 percent this year from a forecast of 2.5 percent previously.
This weaker outlook assumes no serious or prolonged disruption to the availability of fuel in New Zealand.
“It goes without saying that there is currently a huge amount of uncertainty, making forecasting more challenging than at any time since the first Covid-19 lockdown,” Kiernan said.
“But economic growth over the next 18 months will undoubtedly be weaker than previously expected, with the psychological and real effects of the fuel price shock of the last seven weeks unlikely to unwind immediately. We’d hope that inflation is less persistent than we are forecasting, but the experience of the last few years shows the problems that complacency can bring, with higher inflation eroding real incomes and requiring a bigger economic downturn later on.”
Sign up for Money with Susan Edmunds, a weekly newsletter covering all the things that affect how we make, spend and invest money.
– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand
