Is A Slowdown In Inflation Underway For The NZ Economy?

Tuesday, 2 August 2022, 7:02 pm
Article: Kalkine

Summary

• Inflation has reached unpalatable levels in New Zealand, accelerating at a high-than-expected pace of 7.3% over the second quarter.
• Lower household savings and a slowing housing market could contribute to a slowdown in inflation.
• A rebound in tourism might make the path to lower inflation more challenging.

Inflation in New Zealand has taken a concerning route as it accelerated at a higher-than-expected pace. Annual inflation reached 7.3% in the second quarter from 6.9% in the first quarter, as per the latest data by Statistics NZ. The rise in inflation was fuelled by an increase in construction prices. However, a few factors are also emerging on the sidelines that could potentially lessen the speed of inflation.

Inflation has also affected grocery and restaurant prices as food prices rose 6.6% in June 2022 compared to June 2021. Fruits and vegetables have also become costlier, bringing affordability concerns to the spotlight. Rising prices of food could potentially lead to a dramatic shift in the lifestyle of many low-income households.

The current trend suggests that the Reserve Bank of New Zealand will be forced to continue its interest rate tightening regime in the upcoming months. This could worsen the affordability concerns for debt-laden individuals as their monthly rental payments could skyrocket. However, rising interest rates have acted as a double-edged sword as they have helped bring a cooldown in some aspects of the economy. Here are a few factors that suggest that inflation could take a breather in the coming days.

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Diminished savings leading up to reduced spending

Households have increased their expenditure over the past few months, as indicated by the data released by Statistics NZ. In the March 2022 quarter, households engaged heavily in spending, depleting all their savings in the process.

According to Statistics NZ, the savings to disposable income ratio approached zero in the March 2022 quarter. With rising inflation, household expenditure has also increased. The rapid uptick in household spending was behind the observed drop in savings.

However, the reduced saving levels could pave the way for a drop in inflation. Considering the rising inflation, individuals would hold off all unnecessary purchases that can potentially help them rebuild their savings. A drop in demand could push price levels downward, providing some respite to the already heated economy.

A visible slowdown in housing market

The New Zealand housing market has fallen from the painfully high levels seen over the past few months. The net worth of households was recorded to be NZ$42.3 billion lower in the March 2022 quarter than the previous quarter, as per the data released by Stats NZ. This marked the largest quarterly decrease in household net worth since June 2019.

A major factor behind the decline in household values is the sudden drop in housing demand recorded as interest rates started to increase. While the demand for housing units has remained steady, that of stand-alone homes has declined quickly. The home consent for stand-alone homes peaked in August 2021.

However, the trend has swiftly decreased by 21% since June 2021, depicting the narrowing market for individual homes. This has largely been affected by the rising interest rates. Multi-unit homes have become the sought-after option in the high-interest-rate period.

A rebound in tourism could push inflation higher

As tourist flow springs back, it has brought forth a lot of anticipation regarding its implication for the economy. Mostly, the reopening of the Kiwi borders is likely to be of immense help to the slowing economy. However, there are some aspects to keep in mind.

Increased tourist inflow could promote higher spending and demand in the NZ economy. This could potentially contribute further to the ongoing inflation cycle. A bounce back in immigration due to international students is a much awaited happening for the NZ economy. However, this may arrive at the cost of rising inflation.

If the tourist inflow continues to help ease the economic slowdown without having much impact on inflation levels, then it could potentially lead to a balanced outcome. Overall, the economy is largely counting on the rebound in tourism as it could open the doors for recovery in other aspects such as employment and wages. Amid the ongoing challenges, the upliftment of economic growth could eliminate the chances of New Zealand facing a recession.

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