'Sticky domestic inflation' not coming down yet - expert

October 25, 2022

ANZ's chief economist Sharon Zollner has warned that New Zealand's inflation isn't going anywhere yet.

The latest consumer price index (CPI) figures show inflation at 7.2%, down slightly from July's 32-year high of 7.3%.

"We've come out of Covid...with essentially a very over-stimulated economy and housing market in particular," Zollner told Breakfast this morning. "And this has been a global phenomenon. With the benefit of hindsight, both monetary and fiscal policy overdid it.

"We've had a big boom, and now the question is really, how big is the bust going to be?"

Zollner said inflation was a symptom of the "overheated economy" and "in order to get it down, you actually need to slow the economy down and potentially see the unemployment rate go up".

"That's an idea that's really hard to get your head around, that you would want to deliberately slow down growth and cause unemployment, and yet that is essentially the corner that central banks find themselves painted into with inflation over 7%."

Zollner added that New Zealand is in a relatively good position but said international comparisons are "cold comfort" to struggling Kiwis.

"Yes, we've got things going for us, but that doesn't mean it's not tough out there.

"Our forecast, most peoples forecast, is that interest rates are going to keep going up and indeed they're going to accelerate because inflation is just not coming down yet, this sticky kind of domestic inflation is not coming down."

Auckland City Missioner Helen Robinson agreed many households are doing it tough, saying the mission is "really very, very conscious of the level of need that is present in our country".

"We're thinking particularly of people who don't have enough money for food," she said. "What we see and hear is people who are extraordinarily resilient and then people who are just simply trying their best to make ends meet for themselves and their families."

'Some light at the end of the tunnel'

Finance Minister and Deputy Prime Minister Grant Robertson told Breakfast he was optimistic.

"It is tough, and a lot of households when they go to the supermarket are really feeling that at the moment...but this inflation challenge is a global one, it's hitting everybody," he said. "We're just over 7% and we look like we've peaked.

"And so there is some light at the end of the tunnel for people, but I don't underestimate how tough it is for a lot of households right now."

When challenged on whether international comparisons still mattered to struggling Kiwis, Robertson stressed that Aotearoa's inflation rate "appears to have peaked now" and said "we're all working towards the same end here, but this is a global economic cycle".

"And I take your point...people aren't living in other countries so therefore that's not their biggest concern," Robertson said.

"I guess the point I'm trying to make is, in the face of this global situation, I think New Zealand is as well-positioned as anybody else."

He said the Reserve Bank's setting of the official cash rate (OCR) is the primary tool to reduce inflation.

"From our perspective, we're focussed on trying to get to the causes of some of that inflation. For example, in the supermarket sector.

"We don't have a competitive supermarket sector here, New Zealanders pay too much for their food, so that's why you will have heard about the reforms that we're making there," Robertson said.

"It isn't something that's going to go away overnight, I absolutely respect and understand that, but just as we helped people through Covid, we are helping people to get through this now."