Inflation solution ‘nowhere close’

Inflation is on the way down after reaching the annual rate of 7.3% in the June quarter, economists seem to agree, but what they are less sure about is how fast it will fall.

The rate of decline is likely to determine whether fixed mortgage rates have reached their peak, as Kiwibank now believes, or could creep higher.

‘‘It’s not enough for inflation to turn. It has to drop fast and I think that’s a risk that’s underappreciated by markets,’’ said ANZ chief economist Sharon Zollner.

If the Reserve Bank’s forecasts are right, inflation will have fallen to 5.8% by Christmas and to 3.8% by the end of next year.

BNZ sees it falling significantly faster, to 5.2% by Christmas and 3.1% a year on.

ANZ forecasts inflation will ease off more slowly to 6.1% by the end of the year, but then crash to 2.5% by the end of next year.

There is broad agreement on why inflation should have peaked.

Central banks across the world have begun acting tougher on inflation, raising interest rates even in the face of sapping confidence and fears of recessions.

Commodity prices have stabilised or are retreating after Russia’s war on Ukraine caused a spike.

S&P’S global chief economist Paul Gruenwald said at a seminar yesterday economies were slowing, though sentiment looked ‘‘gloomier than the real data’’.

Behind the varying predictions of how fast inflation may fall in New Zealand lie different assumptions about just how tough a nut domestic inflation will prove to be.

BNZ research head Stephen

Toplis believes the combination of falling global commodity prices and a softening housing market will ‘‘meaningfully’’ impact inflation in the current quarter.

He predicts ‘‘the initial drop will be marked’’.

Fellow BNZ economist Craig Ebert believes the Reserve Bank is feeling confident it is ‘‘getting close to getting on top of things’’.

But Zollner warned of a lot of uncertainty about how ‘‘sticky and persistent’’ inflation will be.

Her take is the Reserve Bank is ‘‘nowhere close to getting around this inflation problem yet’’.

Much may depend on what now unfolds in the labour market.

Economists are expecting unemployment to rise, with the Reserve Bank tipping the official unemployment rate will climb from 3.2% in the June quarter to 4.5% by the end of next year. While that might seem modest, it is not so much unemployment that has the most potential to impact inflation, as a drop-off in hiring.

There is growing evidence – at least internationally – that the bigger driver of wage inflation is currently workers changing jobs for higher pay, rather than employers offering pay rises to their existing staff.