Prices rising at fastest rate in three decades: ‘We’re copping it from all angles’

New Zealanders can expect to be told on Thursday that prices are rising at the fastest rate in more than three decades.

Stats NZ is due to release consumer price index data for the December quarter on Thursday morning.

While the country has experienced next to no inflation for years, that has changed sharply in recent months and economists expect prices could have risen at an annual rate of about 6 per cent in the year to December.

ANZ’s economists said anything from 5.5 per cent to 6.5 per cent would not be surprising as an annual rate. The Reserve Bank has forecast a 5.7 per cent lift.

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“The inflation dragon, which has been asleep for decades, has well and truly awoken.”

It was likely that the quarterly increase in December would be driven by petrol prices, up 10.1 per cent quarter-on-quarter, housing costs, recreation and culture costs and a general disruption in the price of imported goods and services, they said.

The bad news for borrowers is that inflation usually leads to higher interest rates.

The Reserve Bank is tasked with keeping inflation at a rate of about 2 per cent and it usually moves to cool inflation by increasing the official cash rate.

The cost of moving goods around the world has increased significantly.

Noah Berger/AP

The cost of moving goods around the world has increased significantly.

The ANZ said aggressive action would be needed this time for inflation to be tamed and that the cash rate could hit 3 per cent by early next year. The last time the rate was at 3 per cent, in 2015, two-year fixed home loan rates were about 6 per cent.

ASB economists said they had pushed up their forecasts and expected inflation would peak at 6.3 per cent early this year before cooling to 3 per cent by the second half of 2023.

“Risks around our fourth quarter pick are tilted to the upside and we see the risk of high inflation being more persistent, potentially threatening the Reserve Bank’s inflation mandate and prompting a more aggressive path of OCR tightening.”

Kiwibank economists said they expected the annual rate to come in at 6.2 per cent, a level that had not been reached since 1990.

“Energy prices surged late in 2021, with petrol prices in the uptrend. A solid 5.5 per cent quarterly rise is expected for transport prices overall. The December quarter is also expected to see decent housing-related inflation. The demand for housing remains strong as consents for new builds continue to hit new highs.”

Disruption to supply chains was also leading to problems with goods coming from overseas, they said. Chief economist Jarrod Kerr said there had been a dramatic increase in the cost of shipping, up about five times.

“Firms are finding it costlier to move goods from the ports to the stores. But in an environment of high demand, firms have been able to pass on these higher costs to customers.

“The December quarter is expected to see strong price rises for imported goods including clothing and footwear, household contents and miscellaneous goods and services. Price movements won’t all be one way though. Breaking a three-quarter streak of price gains, food prices are expected to post a modest decline due to the seasonal drop in prices for fruits and vegetables. However, on an annual basis, food prices will remain significantly elevated.”

There was domestic pressure, particularly from the housing market. “We’re copping it from all angles.”

He expected inflation to settle back to about 3 per cent by the end of the year. A big question that remained would be to what extent wages rose in response to the price increases, he said.

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