The Reserve Bank of New Zealand (RBNZ) has reported a surprising spike in the consumer price index (CPI) that has raised inflation by 1.3%, achieving an annual inflation rate of 3.3% by the end of the second quarter. These figures are well above the RBNZ’s target inflation band of 1-3% and the highest since June 2011. The announcement also sent forex rates into overdrive with the dollar rising by 0.3% to $0.7004.
Statistics New Zealand reports that the increase was driven by higher prices for food, petrol, and new housing. It also noted that pricing was being compared against June 2020 figures when pandemic lockdowns had already kicked in. Industry experts agree with this view when government measures instituted the previous year helped push prices lower and predict that this result will encourage the central bank into tightening monetary policy as soon as August this year.
The RBNZ has already confirmed a halt to their quantitative easing program following increased business confidence, growing inflationary pressures, and a tight labour market. Kiwibank’s chief economist, Jarrod Kerr, has predicted that the RBNZ will further lift the cash rate next month, leading to at least another three hikes going forward. Such a move is expected to make the RBNZ amongst the first central banks in the developed world to start making progress in normalising monetary policy.
The RBNZ has however warned of persistent consumer inflationary pressures driven by growing labour shortages and domestic capacity pressures. It reported that uncertainties were still present given the modest wage growth, underutilisation of labour, and well-anchored inflation expectations.
One food commodity that best reflects the impact of these pressures is the tomato. Food pricing figures released before the RBNZ’s monetary policy statement indicate that tomato pricing has seen a 43% year-on-year increase, reaching a high of $11.19 a kilo this winter. This is two months ahead of its normal peak period. Vegetable pricing has risen by 11.5% and fruit by 6.4%. Overall food prices have increased by 2.8%. Though some increase in food pricing is normal at this time due to seasonal effects, the figures are higher than expected and encompass a wider range of food items.
Finance minister, Grant Robertson, remains cautiously optimistic, saying that though inflationary pressures did exist, the pandemic was not yet over. He said the pressures were of growth and were an unexpected development from the state of the economy a year ago. Robertson added that the government would carry on with the fiscal stimulus plans announced last year, though not if the RBNZ would be hiking interest rates.