Highest inflation in 32 years
The Consumers Price Index increased 7.3% in the June 2022 quarter compared with the June 2021 quarter, the highest annual rate of inflation since June 1990.
The largest contributor to annual inflation was the housing and household utilities group, up 9.1% for the year, due to rising prices for construction (up 18.3%), property maintenance (up 8.0%), property rates and services (up 7.1%), and rentals for housing (up 4.3%). The next largest contributor to annual inflation was the transport group, up 14.5% for the year due to higher prices for petrol (up 32%) and diesel (up 74%) partially offset by a decline in public transport fares.
Our annual inflation rate is well below the OECD average, including for the United States and United Kingdom, but it’s higher than Australia’s and most east Asian countries.
Rates of tradable and non-tradable inflation both hit record highs since those series began in June 2000. Tradable inflation, which measures goods and services influenced by foreign markets, was up 8.7% for the year, while non-tradable (i.e., domestic) inflation was up 6.3%.
Non-tradable inflation measures goods and services that don’t face foreign competition and it reflects how domestic demand and supply conditions affect consumer prices. Its strength shows that inflation is not just imported and due to factors beyond our control. Even though it’s running lower than tradable inflation, non-tradable inflation is the bigger problem.
High inflation was broad-based across CPI groups. When excluding housing and household utilities it came in at 6.5% and when excluding food, household energy, and vehicle fuels it came in at 6.1%. This reflects the problem with non-tradable inflation.
Inflation was stronger than Reserve Bank’s forecast and market expectations (both around 7%). Although the good news is that annual inflation may have peaked, the not so good news is that it will take some time for it to fall back towards the Reserve Bank’s 1-3% target. Non-tradable inflation is generally ‘stickier’ and harder to budge than tradable inflation.
Inflation happens when too much money chases too few goods and services. In this environment both supply and demand must be addressed.
The Government should address supply by relaxing immigration to ease labour shortages, by investing in upskilling the workforce and better educating the future workforce, improving infrastructure, and by ensuring its policies and regulations reduce costs of doing business and improve business confidence. It should also address demand by containing growth in its spending and ensure all its spending delivers strong value for money.
So far though the Reserve Bank is having to do the heavy lifting by hiking the OCR to dampen demand for goods and services. It came to the party perhaps six months too late but it is now making up for lost time.
So, until monetary policy gets some mates we can expect more 50 point OCR hikes, including at the next review on 17 August.
Another GDT drop
The Global Dairy Trade auction had another hefty fall at this week’s auction, with its Price Index down 5.0% compared to the previous event a fortnight ago.
All commodities traded suffered falls. Whole milk powder, by far the biggest by volume, was down 5.1%, skim milk powder down 8.6%, anhydrous milk fat down 2.1%, butter down 2.1%, and cheddar down 2.0%.
The average selling price was $US4,166 and 23,219 tonnes were sold.
The GDT Price Index is 23.2% below its peak at the start of March. It has fallen at eight of the nine events since that peak. However, it is still 3.7% higher than at the same time last year.
Farm sales down
A winter chill has hit the rural land market, with farm sales down sharply for the three months to June 2022.
According to the Real Estate Institute of New Zealand’s Rural Market Statistics, there were 325 farm sales for the three months to June 2022, down 21.1% compared to the three months to May 2022 and down 20.0% compared to the same three month period last year.
1,659 farms were sold in the full year to June 2022, 11.7% fewer than during the previous year. Dairy farm sales were up 9.5%, but other farm types had declines, with dairy support down 32.8%, grazing farms down 21.7%, finishing farms down 10.2%, and arable farms down 12.7%.
The median price per hectare for all farms sold in the three months to June 2022 was $28,040. This was down 6.0% compared to the three months to May 2022 but up 3.2% compared to the same period last year.
Meanwhile, the REINZ All Farm Price Index, which adjusts for differences in farm size, location, and farming type, was up 0.1% compared to the three months to May 2022 and up 28.9% compared to the same period last year.
Petroleum imports fuel big deficit
June saw a further big increase for imports, according to Statistics NZ’s monthly Overseas Merchandise Trade Statistics.
Goods imports of $7.1 billion in June 2022 continued their run of strong growth, up 24.6% compared to June 2021. Petroleum and products had a 206% increase to $1.2 billion. Fertiliser had a 77% increase and other chemicals up 81%. Fuel imports can be very lumpy depending on timings of shipments but higher prices will also have been a major factor. They will likely flow through to businesses, including farms, and consumers.
Goods exports were worth $6.4 billion in June 2022, up 7.7% compared to June 2021. Milk powder, butter, and cheese exports were up $7.1% to $1.7 billion; meat and edible offal up 18.5% to $964 million; preparations of milk, cereals, flour, and starch up 57.6% to $239 million; and caseins and caseinates up 68.8% to $162 million.
The goods trade balance in June 2022 was a deficit of $701 million, a sharp reversal of the $245 million surplus in June 2021. Surpluses are typical in June months.
On an annual basis, for the year to June 2022, goods exports were $67.6 billion, up 11.9% on the previous year. For the key primary sector export commodities:
- Milk powder, butter, and cheese: up 16.7% to $18.4 billion.
- Meat and edible offal: up 19.5% to $9.6 billion.
- Logs, wood, and wood articles: down 2.2% to $5.2 billion.
- Fruit: up 3.9% to $4.0 billion.
- Preparations of milk, cereals, flour, and starch: down 5.1% to $2.1 billion.
- Wine: up 5.3% to $2.0 billion.
- Casein and caseinates: up 41.9% to $1.5 billion.
In addition, live animal exports were down 7.1% to $492 million; eggs, honey, and other animal products down 5.0% to $492 million; and vegetables down 6.6% to $441 million. However, wool exports were up 10.6% to $440 million
Annual growth in goods imports was huge, up 28.7% to $78.1 billion. There were particularly big increases for other chemical products (up 96%); fertilisers (up 86%); pharmaceutical products (up 61%); petroleum and products (up 60%); and iron and steel articles (up 54%).
The annual goods trade balance for the year to June 2022 was a huge deficit of $10.5 billion, a massive increase from a $277 million deficit for the previous year.
Manufacturing contracts, services expands
The seasonally adjusted PMI for June was 49.7 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was 2.9 points lower than May and also well below the long-term average of 53.1. The key sub index values of Production (47.8) and New Orders (47.8) both contracted. 68.5% of manufacturers provided negative comments, down slightly compared to May.
On the other hand, the PSI for June was 55.4, up 0.1 point from May, and above the long-term average of 53.6 for the survey. The two key sub-indexes of New Orders/Business (61.7) and Activity/Sales (56.5) remained at very healthy levels of expansion, more than compensating for supplier deliveries (47.8) still stuck in contraction. However, despite relatively strong result the proportion of negative comments rose to 59%.
Statistics NZ’s quarterly Greenhouse Gas Emissions showed a small reduction in emissions for the year to December 2021. They were also 6% lower than pre-pandemic levels.
For the year to December 2021, total emissions were 79,300 kilotonnes, down 0.9% on the year to December 2020 and also down 6.1% compared to the year to December 2019. Most industries had declines in their emissions, with agriculture, forestry, and fishing’s emissions down 0.2% for the year. Household emissions were up 1.1% though.
On a quarterly basis, comparing December 2021 with September 2021, emissions were up a seasonally adjusted 1.1%. Agriculture, forestry, and fishing’s emissions were up 0.4%.
NIWA Soil Moisture Data. NIWA’s latest soil moisture maps (as at 9am Thursday 21 July) show most areas with soil moisture about average for this time of year. This week’s heavy rain has resulted in most of the east coast of the South
Overall, the NZ Dollar was stronger this week, up 1.4% against the Trade Weighted Index. It was up against most of our main trading partner currencies, the exception being the Australian Dollar.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week, the yield for the 90 Day Bank Bill was up 11 points to 3.16% while the 10 year Government Bond yield was up 9 points to 3.79%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 17 August.
|This Week (21/7/22)||Last Week (14/7/22)||Last Month (21/6/22)||Last Year (21/7/21)|
|90 Day Bank Bill||3.16%||3.05%||2.80%||0.45%|
|10 Year Government Bond||3.79%||3.70%||4.22%||1.53%|
Source: Reserve Bank of NZ