Source: Radio New Zealand
Finance Minister Nicola Willis. RNZ / Mark Papalii
Finance Minister Nicola Willis might be being optimistic if she thinks inflation at 3.7 percent is a “worst case scenario”, one economist says.
Willis told media on Monday that in the event of a prolonged conflict in Iran, lasting until the end of the year, inflation could hit that level, as modelled by Treasury.
Infometrics chief forecaster Gareth Kiernan said that seemed light.
Data on Tuesday showed food prices up 4.5 percent over a year, alcohol and tobacco up 0.2 percent month-on-month and electricity up 1.6 percent month-on-month, a bigger jump than expected. Domestic airfares were up 12.8 percent compared to January and more than 10 percent over a year.
“It just makes me a bit nervous in terms of how realistic it is to expect inflation to moderate through the course of this year.
“There are so many little bits you can look at and go oh there’s issues there … which suggests it’s going to be perhaps more difficult to get it back down to 2 percent than the Reserve Bank might have been anticipating.”
He said he would be redoing forecasts over the next couple of weeks and would increase his expectations.
Infometrics chief forecaster Gareth Kiernan. RNZ / Rebekah Parsons-King
“My instinctive reaction to the number from the Finance Minster yesterday of 3.7 percent being a worst-case scenario … it felt too light to be a worst-case scenario.”
At ANZ, senior economist Miles Workman said the bank’s had updated its forecast.
“The Middle East conflict is no longer shaping up to be a short, sharp shock.”
It now thinks inflation will peak at an annual rate of 3.6 percent in the third quarter of the year, with oil prices hovering around US$100 a barrel for some time yet before falling again towards the end of the year.
“Base effects, together with the assumption that oil prices eventually normalise, see annual inflation troughing at 1.4 percent in Q3 2027 before stabilising around 2 percent over the medium term. There are risks on both sides of this.”
Westpac said it now did not expect inflation to get below 3 percent until the end of the year.
Mike Jones, chief economist at BNZ, said it would be the second quarter data on for inflation that bore the full brunt of the direct effect of rising fuel prices, although there would be some impact on the March month of the first quarter.
“Things are clearly still moving around but we recently bumped up our Q1 inflation forecast to 2.9 percent , with Q2 rising to 3.6 percent.
“As always there are overs and unders to balance [from Tuesday’s data] … But we’re left with a bit of upside risk on that 2.9 percent forecast for Q1. We didn’t see quite the extent of seasonal declines in fresh fruit and vegetable prices we’d factored in.”
ANZ said it did not think the change to the outlook for inflation would affect its official cash rate predictions yet.
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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand
