Has Inflation Peaked?

Its official, inflation in NZ is at its highest level in over three decades at an annual rate of 7.30% according to the latest Consumer Price Index (CPI) released this week. As inflation rises so to do interest rates and vice versa.

The big question is therefore, has inflation peaked and if so, how quickly will it fall back to within the Reserve Bank’s target range of 1.0% to 3.0%?

Over the last year or so we have had a constant barrage of inflation surprises and central banks around the world hiking interest rates largely in response to global supply shocks due to Covid and the Ukraine war, a mismatch between supply and demand where too much money is chasing too few goods and also a global shortage of labour.

In response Central Banks have raised interest rates. The New Zealand Reserve Bank has joined the party with multiple increases in the OCR from .25% in 2020 to 2.5% now, with more increases likely in an attempt to slow the economy. These increases have worked, as I expect the NZ economy to fall into a recession this year and for this to continue into next year.

A recession in NZ is when there are two successive quarters of negative growth. In the first quarter of this year the economy contracted and another contraction over the June quarter would put NZ officially in recession

But I am seeing tentative signs that the tide may have turned

· Hard commodity prices such as iron, nickel and aluminium have fallen towards pre – Ukraine war levels

· Oil prices have started to fall

· US inflationary expectations for the next five years have started dropping

· 30-year US mortgage rates have fallen from 5.70% to 5.30%

· Locally the 2-year fixed mortgage has fallen 30 points.

I think it way too early to declare victory, and central banks around the world have a lot more work ahead of them. It could take at least another 2 to 3 years to get NZ inflation back anywhere near the Reserve Bank target range.

Perhaps Winston Churchill summarised it best in 1942 after the battle of Al Alamein

“This is not even the beginning of the end. But it is, perhaps, the end of the beginning”