Inflation running hot
As widely expected, inflation intensified in the March 2022 quarter, increasing to its highest annual rate in 32 years.
Statistics NZ’s Consumer Price Index recorded a 1.8% increase in the March quarter compared to the December quarter, pushing the annual rate of inflation up from 5.9% to 6.9%. Although a little lower than most economists’ expectations of something with a seven in front of it, it was still the highest annual rate of inflation since June 1990 when it was 7.6%.
Contrary to claims that high inflation is due to international factors, such as surging oil prices and supply chain bottlenecks, inflation was broad-based and strong for both tradable and non-tradable components of the CPI.
Inflation’s broad-based strength is shown by various ‘trimmed mean’ measures, which exclude extreme price movements. These ranged from 5.2% to 6.5%, lower than the 6.9% headline rate but still around twice the upper band of the Reserve Bank’s target of 1-3%.
Annual tradables inflation (goods and services imported or in competition with foreign goods and services) was 8.5%, showing the impact of international factors. However, non-tradables inflation (goods and services not facing foreign competition) was also strong at 6.0%. This reflects domestic factors, including the hangover from huge monetary and fiscal stimulus over the past two years.
The biggest contributors to high inflation were:
- Housing and household utilities prices increased 8.6%, influenced by home ownership (up 18.3%) and rentals for housing (up 4.0%).
- Transport prices increased 14.3%, influenced by private transport supplies and services (up 23.1%) and purchase of vehicles (up 5.6%).
- Food prices increased 6.7%, influenced by fruit and vegetables (up 17.0%) and grocery food (up 5.5%).
- Miscellaneous goods and services prices increased 5.6%.
- Recreation and culture prices increased 4.8%.
Looking ahead there will be more to come with inflation still tipped to exceed 7% in the June quarter. Everyone acknowledges inflation is a big problem, yet so far it’s been left to the Reserve Bank to do all the heavy lifting through OCR hikes and reducing its holdings of assets purchased as part of its pandemic stimulus efforts (‘quantitative tightening’).
As mentioned in last week’s update the Government now needs to do its bit by reining in its runaway spending. Government spending is forecast to hit $128 billion this year, a staggering $52 billion (or 68%) more than in 2017. No one can credibly say there isn’t fat amongst that $128 billion spend. We’re often asked what we’d cut.
There’s the big stuff, like the core public sector wage bill after massive growth in policy advisors, spin doctors and consultants, which will only grow with costly reforms of health and three waters. And then there’s the small stuff that quickly adds up, like the fire hose of grant money for dubious social research and some frankly weird arts and cultural projects, or the endless taxpayer funded advertising campaigns, many of which are cringe worthy or thinly disguised propaganda – or both.
The Government must be laser-focused on its spending and ensure it’s phased, controlled, and delivers value for money. New spending initiatives should be funded by reprioritising existing spending rather than simply increasing the quantum as currently envisaged.
And longer-term the Government needs to consider how its wider policies, including its legislation and regulation, can improve the business environment and boost the economy’s competitiveness and productivity so it can grow without generating so much inflation.
Dairy prices had another drop at this week’s Global Dairy Trade auction, its third loss in a row.
Overall, the GDT Price Index was down 3.6%, with prices down for all commodities. Whole milk power was down 4.4%, skim milk powder down 4.2%, anhydrous milk fat down 1.3%, butter down 3.7%, cheddar down 3.9%, and lactose down 1.3%.
The average selling price was $US4,855 and 22,179 tonnes of product were sold.
Despite the recent drops, the GDT Price Index is still 13.1% higher than at the start of this year, and 16.1% higher than at the same time last year.
The PMI for March was 53.8, up 0.2 points from February. A PMI of over 50 indicates that manufacturing activity is generally expanding and one below 50 indicates it is declining. The New Orders sub-index was especially strong (61.0), but all were above 50, including Finished Stocks (53.5), Employment (52.4), and Production (50.9).
Meanwhile, the PSI of 51.6 was up 2.7 points and its first positive score in seven months after what has been a very difficult period for many services businesses. As with manufacturing, the New Orders sub-index was strongest (60.1) while Activity/Sales was also positive (53.8). However, Employment (48.5) and Supplier Deliveries (40.1) remained in contraction.
Comments from manufacturers and services businesses were both still mostly negative although both a little less so than in February.
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 21 April) show a continuation of wetter than usual soil conditions across eastern areas of the North Island from Northland to Wairarapa. It is the opposite across western areas of the Island, with soils drier than usual, especially in the Waikato. In the South Island, Tasman-Nelson, parts of Canterbury, and most of Otago and Southland are drier than usual. Kaikoura is the exception with its soils wetter than usual.
The NZ Dollar was virtually unchanged this week against the Trade Weighted Index. It was mixed against our key trading partners – down against the US Dollar and Australian Dollar, up a bit against the Yen and the Renminbi, and almost unmoved against the Euro and the Pound.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week, the yield for the 90 Day Bank Bill was up another 15 points to 1.94% but the 10 year Government Bond yield was down 2 points to 3.46%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 25 May 2022. Market pricing suggests it will be another 50 pointer.
|This Week (21/4/22)||Last Week (14/4/22)||Last Month (21/3/22)||Last Year (21/4/21)|
|90 Day Bank Bill||1.94%||1.79%||1.56%||0.34%|
|10 Year Government Bond||3.46%||3.48%||3.16%||1.61%|
Source: Reserve Bank of NZ