Annual inflation in the year to the March 2022 quarter rose by 6.9%, the highest increase since a 7.6% annual increase June 1990.

This is the largest increase in over 30 years and surpasses the previous largest annual movement of 5.9% which was recorded for the December 2021 quarter. The February edition of InfraRead discussed that increase and its implications in considerable detail. The Reserve Bank of New Zealand responded with a conservative 25-basis point increase to the official cash rate (OCR), bumping it up to 1%, and equalling the rate set between August 2019 and February 2020. We covered the OCR increase in the March edition of InfraRead.

The Reserve Bank followed with an expected, more aggressive OCR hike of 50 basis points earlier this month, which raised the OCR to 1.5%.

This latest increase in inflation sets the scene for a further OCR increase in May 2022.

The main driver for this latest spike in annual inflation was the housing and household utilities group, influenced by rising prices for construction and rentals for housing. Prices for the construction of new dwellings increased 18% in the March 2022 quarter compared with the March 2021 quarter, the largest increase recorded since the series began in 1985.

The next largest contribution to the annual inflation was from the transport group, influenced by higher prices for fuel and second-hand cars. Petrol prices increased 32% in the year to the March 2022 quarter, the largest annual increase since the June 1985 quarter.

There has been increased volatility in fuel prices, made worse by Russia’s invasion of Ukraine. As reported in last month’s InfraRead, the seriousness of the issue has already resulted in a rare move from the Government to reduce the petrol excise duty by 25 cents per litre for the three months starting 15 March. The Government has also reduced the RUC by 36% across all legislated rates from late April till late July 2022, that is, for RUC purchased from late April. An extension to this reduction has not been ruled out.

The cost-driven inflation increase does not bode well for the infrastructure sector. Statistics New Zealand says construction firms have been experiencing many supply-chain issues, higher labour costs and higher demand, which have pushed up the cost of building.

In the short-term, New Zealand risks of becoming a high wage economy with poor productivity levels. This will have significant implications for the infrastructure sector in terms of added cost escalations.

The high inflation and interest rate increases have implications for New Zealand’s economic recovery. Reserve Bank Governor Adrian Orr has suggested more targeted, effective fiscal policies from the Government would help bring inflation down. This all places added pressure on the Government to tread carefully when it delivers Budget 2022 on 19 May. Government spending that unduly increases household consumption may support increases in the gross domestic product, but it could fuel further demand-pull inflation.