“Excellent news…” one economist whispered to me during Statistic New Zealand’s consumer price index lock-up on Wednesday.
“...bog roll is getting cheaper.”
They were correct. Prices for 12 rolls of toilet paper had fallen 9.1% between the September and December quarters and was down 11% from its peak in June 2023.
It's not a bad illustration of one reason headline inflation has fallen so fast.
Toilet paper prices spiked in mid-2021 as the covid pandemic disrupted the supply chains which bring in the raw materials used to manufacture the product.
Shipping costs increased, because there were fewer ships, and wood pulp commodity prices shot higher because less was being produced and exported.
Consumers in New Zealand, fearing they might get caught out by the toilet paper shortage, were buying more than usual. Conditions were perfect for higher prices.
Now all those trends have unwound. Households have become more cost conscious and producers have been able to cut prices because shipping and pulp costs have fallen.
One person familiar with the industry said supply chains had finally returned to normal and large amounts of raw materials were arriving in New Zealand from Southeast Asia.
Immaculate disinflation
New Zealand’s consumer price index is heavily weighted towards goods, which make up about 62% of the basket. In Australia that number is 56% and just 38% in the United States.
Since so many of our goods are imported, the inflation rate has been falling.
This has been driven by weak inflation pressure in China, normalisation in freight costs, and falling commodity prices.
Nic Guesnon, an economist at UBS’ global research and evidence lab, said he expects inflation to drop to 2.2% by the last quarter of 2024.
“We are feeling more confident that goods prices will remain weak. However, services prices are also likely to start slowing if the labour market loosens rapidly as we expect”.
The goods component in December’s quarterly consumer price data was up just 0.1%, while the services component was up 1.1%.
Marathon mile
Bevan Graham, an economist at Salt Funds, said it was “increasingly problematic sticky” price pressure in core services that would make inflation persistent.
“Global inflation has peaked, but the last mile to target will, like running a marathon, be the most arduous,” he wrote in a recent 2024 outlook report.
It is the sticky services inflation that the Reserve Bank has been targeting with tight monetary policy and the part that could require weakness in the labour market to achieve.
While goods prices have largely sorted themselves out, wage growth has embedded itself in local services and needs monetary intervention to cool.
This was visible in the December quarter. Rising rents (a sort of service) was the single largest contributor to the headline number and was almost perfectly offset by falling food prices (goods).
Domestic accommodation services contributed about the same amount to quarterly inflation as the purchase of second-hand cars detracted.
Generally, goods prices are settling down while inflation in services is sticking around.
Early next week, RBNZ chief economist Paul Conway will give a speech that will touch on the economic data that has been released since the November Monetary Policy Statement.
It is likely that he will discuss the difficulty of getting services inflation under control and reaffirm the central bank’s plan to hold the Official Cash Rate at 5.50% until 2025.
The market has been coming around to this point of view. Traders were pricing in a full 25 basis cut in May 2025 a month ago, but had pushed it out until July as of Friday morning.
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