Another very sharp rise in food prices raises further questions about the Reserve Bank's benign inflation forecasts

By David Hargreaves

As anybody forced to push a shopping trolley around a supermarket on a regular basis may have testily noted, the price of fresh food appears to have been shooting up, driven by the wet weather.

The official confirmation and explanation for your vexation about stratospheric lettuce, tomato and broccoli prices among others has come from Statistics New Zealand, which says the price of vegetables has soared a record 31% in the year to May.

Overall food prices jumped 2.4% in May, with the seasonally-adjusted increase (IE taking into account the fact that winter was just about upon us so higher prices could be expected), being a strong 1.6%.

In the year to May overall food prices rose 3.1%, which is the highest rise since the 2010 GST increase.

The significant thing about the latest surge in food prices is what it may or may not do for the overall inflation outlook.

In this regard, the latest rises will put the spotlight firmly on the Reserve Bank's benign inflation projections made last month, which suggested that June quarter inflation as measured by the Consumers Price Index would drop to just 0.3% from the very high 1% figure (to which food prices contributed) in March.

The RBNZ believes annual CPI inflation will drop from 2.2% as of March to 2.1% in June and then 1.7% by the end of the year and just 1.1% by the end of the March 2018 quarter.

These figures, central to the RBNZ's view of where interest rates should sit, have been viewed with scepticism by the marketplace and this scepticism will at the very least linger, if not heighten, after the latest food figures.

The RBNZ had been expected to 'look through' the relatively high inflation figures earlier this year, and did, but the market was still surprised that in its May Monetary Policy Statement it did not change its earlier projection of no interest rate rises till late 2019.

For the record, food prices make up a little over 17% of the Consumers Price Index, so they are influential, but not overwhelmingly so. Housing and household utilities (at around 20%) make up the biggest contribution, while external and uncontrollable things such as oil prices (which HAVE recently slumped again) are also significant.

The RBNZ has a target of achieving 1% to 3% inflation, with a specific aim of hitting the 2% midpoint of that range - but it has been missing its targets for a very long time.

One view is that having undershot its inflation targets for so long and having seen the spectre of inflation when it did not ultimately exist many times, the bank is now waiting to see 'the whites of its eyes' of inflation before changing its view on interest rates.

Certainly the central bank may again seek to 'look through' the latest food-led inflation surge, but unease in the marketplace about its positioning is likely to increase if the June quarter CPI figure turns out substantially higher than the 0.3% the RBNZ projects.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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7 Comments

Theoretically, the upward pressure from food inflation may partially be offset by stabilising oil and house prices. However, a 6.7% YoY inflation in house prices is still high compared to the 1-3% inflation target. Also, nobody expects our greedy fuel retailers to pass on any of those falling costs to the consumers in the face of falling crude prices. So, the inflation may well be more than 2.1% YoY for the quarter.

"Theoretically, the upward pressure from food inflation may partially be offset by stabilising oil and house prices."
...exactly how so?

Also, who has a target of 1-3% for house price inflation?

1-3% general inflation. The 6.7% house price is still higher than the target range for the overall inflation, hence pushing it up by a bit since it makes up a part of it, not sure how much precisely.
Do you have a counter-argument?

Housing is not included in the inflation basket of goods. Perhaps with such a shallow understanding of economics and economic statistics, it would be best to not say anything at all.

My counter argument would be that you read about CPI measurement.

Meh... let them eat cake!

I wonder how much of it is opportunistic winter pricing by the various cartels in the value chain ?