How Fast Will Inflation Fall?

First signs New Zealand’s inflation might fall – according to leading economists

There’s no need to fear yet another story about inflation, as it may be good news this time around!

Pleasingly, economists mostly seem to agree New Zealand’s inflation should have already peaked, as is the case with most nations. Central banks around the world have adopted a tough stance on inflation, lifting interest rates even in the face of declining consumer confidence and growing fears of recession. Meanwhile, most commodity prices have stabilised or are already retreating (at least for the time being) after an uptick following Russia’s war on Ukraine. Supply chain impacts will persist for some time, but the intensity and spikes in rising costs seem to have abated.

That said, economists seem less sure about how fast inflation would fall from here. Behind the varying forecasts on how quickly inflation may drop in New Zealand lie different assumptions about just how tough it will be to reverse the course of domestic inflation.

What the Professionals Have to Say: Falling Inflation

Stephen Toplis, BNZ Head of Research, said falling global commodity prices combined with a softening housing market will “meaningfully” impact inflation in the current quarter.

Toplis predicted “the initial drop will be marked.”

“It’s not enough for inflation to turn, it has to drop fast, and I think that’s a risk that’s under appreciated by markets,” Sharon Zollner, ANZ chief economist, separately told Stuff, though then she also seemed pessimistic with another audience, as she warned that there was a lot of uncertainty about how “sticky and persistent” inflation would be. She held that the Reserve Bank of New Zealand was “nowhere close to getting around this inflation problem yet.”

Independent Economist Thoughts

In a different piece, independent economist Tony Alexander noted “The worsening forecasts for the likes of the UK economy and China only add to this view of inflation falling. So too does the evidence of some things falling in price such as oil, food and minerals.”

“For the moment, inflation rates and risks remain high, and it will be some time before central banks express confidence about inflation,” he said. “Eventually they will, and when they do, it is likely to cause some additional decline in wholesale borrowing costs, which will feed through to some cuts in fixed mortgage rates.”

Alexander said people should not be optimistic about interest rates either falling away quickly or settling within a couple of years back at the extraordinarily low levels we experienced for most of the decade from 2010 to 2020.

“Central banks are going to keep a close eye on labour market measures [including employment levels] to gauge the extent to which upward pressures on wages growth will be easing,” he said. “The trouble is the labour market is a lagging indicator of the state of the economy. It will be one of the last things to change. That might not matter much if the economic outlook were to suddenly deteriorate a lot. However, there is a structural shortage of labour in New Zealand, which is only going to be temporarily alleviated in the coming two years by the slowing of the pace of economic growth.”

Alexander said interest rate moves served to remind people that things do not move in straight lines in the financial world.

The World Is Still Uncertain

Nick Tuffley, the ASB Chief Economist, thought Russian president Vladimir Putin “holding his foot on the throat of Europe’s gas supplies” is “certainly having an impact on European growth.”

The impact of the war on Ukraine though could be dwarfed by the potential impact of recent wild weather events around the world, Tuffley said.

“You've got droughts in Europe, you've got phenomenal droughts in China,” Tuffley said. “And over the next year, that could potentially have some profound impacts on what will happen to food prices, that may compound the impacts of the war.”

ASB also pointed out that after years where New Zealand was cut off from the world, inbound migration is unlikely to boost the pool of workers quickly enough, which is making it hard to reign in employment and wage growth.

Considering such concerns, there is every chance inflation might not just be headed downward from here.

The Bottom Line: Inflation Will Fall

There’s little doubt inflation will fall from its current levels. How long that takes and the rate of decline is up for debate, and only time will tell.

Clearly this issue impacts those of us who are trying to manage a budget. Hang in there, you’ve made it this far, and it seems there’s light at the end of the inflation tunnel.