More inflation to come?

Headline inflation data for the March 2021 quarter showed prices rose 1.5%pa, in line with market expectations. However, the underlying trends for inflation remain difficult to judge, with temporary cost pressures likely to push inflation higher in the short term. But we remain of the view that the Reserve Bank will look through these pressures and won’t substantially change monetary settings for a while.

Housing and transport keep pressure on household budgets

Although headline inflation advanced a touch, up 0.8% from the December 2020 quarter compared with 0.5% in the previous quarter, there were a mix of pricing changes for different groups. Food prices overall were slightly lower than previously, particularly with meat prices being kept in check (see Chart 1).

But moving around and getting a roof above your head both got more expensive. Rising prices for petrol, rents, and new buildings contributing over half of the total lift in inflation together, the kinds of things that will hit almost every Kiwi’s back pocket. Of note:

  • Petrol prices rose 7.2% in the March quarter, as revived global growth expectations have supported oil prices to return to around pre-pandemic levels. Stats NZ and MBIE data shows prices have continued to advance, and are now at over $2.0/L for 91 petrol.
  • Rents are up 2.7%pa, after a period of slower growth in 2020 due to the impact of the government’s temporary COIVD-19 rent freeze – now, rents are rising at their fastest pace in a year. This rise in housing costs occurred before the government housing changes were announced, and reinforces our view that rents will continue to steadily rise regardless of the recent announcement.
  • The “purchase of new housing” category, which is really the cost of new building, has increased 3.5%pa as supply chain issues create capacity constraints. The price of some inputs have risen further, with spouting prices up 9.2%pa in March 2021.
  • Household appliances and second hard cars are also pricier, up 4.5% and 8.2%pa respectively – the latter being the fastest in nine years. Supply chain issues for both have sent prices tracking higher.

We expect that increased prices will hit those on the lowest incomes the hardest, with proportionally more money from low-income budgets going on some of these groups (housing and transport) and less on communications items where prices continue to fall.

Producer costs likely to rise further

Shipping costs remain under intense pricing pressures, with the Freightos Baltic Index (FBX): Global Container Freight Index showing shipping prices sitting 189% higher than a year earlier (see Chart 2).

Rising shipping costs, uncertainty, and in some cases the complete unavailability of goods, will be hitting some businesses hard. At present we are hearing more discussions about price rises as firms look to deal with these increased costs. With business price data to be published in May, we will be looking for signs of these cost pressures emerging. Squeezed profit margins, and some businesses still hit by the COVID-19 downturn in 2020, means that there appears to be a rising appetite for passing on cost rises to consumers.

Related to these business cost rises, higher fuel prices will boost transport costs for road fright in New Zealand, which will add further to the higher shipping costs just outlined. None of these higher costs will go away quickly, with supply chain issues expected to persist until the end of 2021. New Zealand should prepare for higher costs over the next 9 months, as supply chain issues combined with more government changes and a recovering global economy will add upwards pressure to prices.

More pressure on prices in the North Island

Regional inflation is strongest outside the major centres, with prices across the rest of the North Island (ex Auckland and Wellington) up 2.0%pa (see Chart 3). Housing costs in the North Island also remain under the greatest pressure, as higher building rates and pockets of faster rental growth are underpinning this trend.

Rental rises in Wellington continue to outpace other areas, with rents up 4.3%pa in the region in March 2021, compared to 2.7%pa nationally and 1.1%pa in Auckland.

Increased construction activity across the North Island has seen the price of new builds rise at a faster rate than other areas, with North Island costs up 3.7% – ahead of Auckland (2.7%pa) and Wellington (2.0%).

Higher prices to come in the short term

We expect price rises to become stronger throughout the rest of 2021, with wholesale power prices on the up, fuel prices still rising, and businesses facing higher input costs as distribution issues and minimum wage increases mean they look to pass on these costs.

However, further into the future, inflation expectations are less certain. Given the hesitation around inflation moving forward, we continue to expect the Reserve Bank to be cautious in its future decisions, opting to wait until inflation appears to be holding sustainably at around 2%pa before making substantial changes to remove monetary supports.

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