The inflation landscape of 2024 is difficult to predict, reflecting both global and domestic economic dynamics. As we discuss the current trends, it's essential to consider the multifaceted nature of inflation and its implications.
Inflation Trends in New Zealand
Recent data indicates a gradual decline in inflation. The annual inflation rate, as of the fourth quarter of 2023, was recorded at 4.7%, a decrease from the previous quarter's 5.6%. This marks the lowest level of inflation since mid-2021. The Consumer Price Index (CPI) rose by 0.5% in the fourth quarter, a slower pace compared to the 1.8% rise in the third quarter, aligning with the expectations of economists.
Factors Driving Inflation
The primary contributors to annual inflation include sectors such as food, alcohol and tobacco, and housing and household utilities. Non-tradeable inflation, which includes domestic goods and services, remains a significant concern at 5.9%. This is higher than the central bank's comfort level, indicating persistent domestic inflation pressures.
The Reserve Bank's Response
The Reserve Bank of New Zealand (RBNZ) raised its policy interest rate to 5.5% in mid-2023 from a record low of 0.25% in October 2021, in an effort to dampen inflationary pressures. The central bank's stance remains cautious, waiting for the higher rates to impact the economy and bring down inflation. There's an anticipation that inflation rates will return to the target band by the second half of 2024.
Economic Outlook and Challenges
The forecast suggests that "one-off spikes" in inflation may become more common, influenced by global factors like geopolitical tensions and climate change. These conditions suggest that New Zealand's era of importing global deflation through lower import prices may be over. Economists are forecasting a challenging path ahead, with potential for further interest rate hikes if inflation does not decrease as expected.
Impact on Businesses and Consumers
Businesses are likely to feel the pinch of inflation, now and into 2024, as they face increasing costs due to higher interest rates on debts and reduced consumer spending. While the economy is strong with low unemployment, concerns persist about potential economic fragility in the future if inflation remains high and interest rates stay elevated​.
While New Zealand’s inflation rate shows signs of cooling, the road ahead remains challenging with a mix of domestic and global factors influencing the trajectory. The RBNZ's efforts to bring inflation back within its target range will be crucial, as will be the resilience of the domestic economy in the face of these adjustments. The balance of risks remains tilted towards more interest rate hikes to achieve this goal, and businesses, as well as consumers, need to brace for a period of economic adjustment.
