Inflation not done, but there’s hope

Inflation isn’t down on the canvas yet. But it is on the ropes. This week’s news that annual inflation dipped to 4 per cent in the first quarter (from 4.7 per cent) was welcome. Although, as economists have pointed out, there were some worrying signs of life buried beneath the topline data.

If we look at the last quarter, the consumer price index (CPI) rose 0.6 per cent. In a sense that is the more relevant figure because that is the inflation rate we are experiencing right now (as opposed to annual figures which factor in the rate from the middle of last year).

If we annualise the latest quarter, we’d get 2.4 per cent inflation — inside the Reserve Bank’s 1-3 per cent target band.

Stats NZ points out that rising prices for alcoholic beverages and tobacco, and recreation and culture, boosted that quarterly number.

Cigarette and tobacco prices rose 6.5 per cent in the March 2024 quarter. The annual tobacco excise tax increase occurred on January 1, 2024.

The latest figure also included an outsized rise in the cost of overseas accommodation, which goes into the CPI when booked in New Zealand. At least one economist pointed out the spike coincided with February’s Taylor Swift mania in Australia.

But even if we look through those factors, domestic accommodation costs continue to rise above the topline inflation rate. Rising rents are a very real cost-of-living problem for many Kiwis.

Economists break all these different cost inputs into two broad categories.

In the past few years of high inflation, many Kiwis have also been forced to learn about what economists call tradable and non-tradable inflation.

Non-tradable inflation measures final goods and services that do not face foreign competition and is an indicator of domestic demand and supply conditions. Tradable inflation measures final goods and services that are directly influenced by foreign markets — like oil prices, electronics and building products.

It’s the non-tradable inflation that is worrying economists. On an annual basis it is still way too high — 5.8 per cent.

But we are making some progress.

UBS analysis shows that, after adjusting for seasonal patterns, all measures of quarter-onquarter inflation eased further in the latest data.

This includes non-tradable CPI, which rose 1.6 per cent, UBS economists say.

Non-tradable inflation will fall. As high interest rates continue to bite and the economy stumbles through a year of recession and low growth, good old supply and demand will work their magic.

Higher unemployment and less consumer spending and investment will put a cap on local pricing.

But it is a hell of a cure and not something we should prolong, not least because the longer it takes to get non-tradable inflation under control, the more risk there is that we run into another global supply shock driving up commodity prices and kickstarting the whole cycle.

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