Inflation likely to continue - bank economists

ASB is expecting inflation to rise past 6% this year and linger on for a while.

The comments follow last week's announcement that the Consumers Price Index (CPI) increased 5.9% in the year to December.

This was aided by a 1.4% rise in the December quarter, and is the highest annual rate since 1990.

“High NZ inflation does not seem to be transitory,” said the bank's senior economist Mark Smith.

“A broadening front of rising inflation is emerging that will be difficult to slow, and we expect annual CPI inflation to remain above 3% well into 2023,”

Smith's “broadening front” refers to domestic or non tradable inflation rising 5.3%. This is in addition to inflation that New Zealand inherits from overseas price rises, which cannot be avoided.

He made clear this broad based inflationary attack will ricochet onto the public, who will have to pay higher interest rates.

“Persistently high inflation and an extraordinary tight labor market backdrop and outlook warrants a faster pace of OCR hikes and a higher OCR endpoint,” Smith wrote.

“The RBNZ looks to have an inflation problem that they need to deal with.”

Westpac's senior economist Satish Ranchhod also reacted strongly to the inflation announcement with a comment entitled “To Infinity and Beyond.”

While he toned down Buzz Lightyear's hyperbole in the body of his report, the message was still serious.

“With inflation bubbling away, Westpac is expecting a 25bp increase in the OCR at the upcoming February policy decision. We expect that will be followed by a series of OCR hikes over the coming year, with the cash rate peaking at 3% in 2023.”

And there were other problems.

“ While the direction for interest rates is up, the economic landscape remains rocky and changing. Most notably, the continuing spread of Covid and its variants will challenge economic conditions here and abroad.”

Kiwibank's economics team is also very worried.

“We’ve yet to see the peak in inflation given the ongoing supply-side pressures,” they wrote.

“Global supply chain issues are yet to be resolved and energy prices – especially oil – continue to surge.

However the growing strength of the domestic drivers of inflation is most concerning....strong domestic inflation certainly threatens an extended period of high inflation.”

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