Household budgets appear set to bare the brunt of the increasing inflation rate, which will likely prompt the Reserve Bank to hold its interest-driving 8.25% official cash rate at the highest level in the developed world.
The building stress on household budgets was a feature in commentary from economists and the Minister of Finance, Michael Cullen, on the effects of inflation and rising mortgage rates.
The Reserve Bank initially began hiking interest rates to dull increasing debt and spending fuelled by the housing boom of the past five years. But despite a weakening economy and a slew of recent pessimistic business confidence data, the central bank is keeping the OCR high to quell household spending, which is driving inflation.
As picked by most analysts and economists last week, escalating food and fuel prices are underpinning the annual inflation rate, which yesterday rose to 3.4% from a year ago. It remains beyond the Reserve Bank's outer target of 3% with little optimism it will draw back beyond that limit for at least the rest of the year.
The higher OCR means higher fixed and floating mortgage rates - respectively already beyond 9% and 10% - for both new home owners and those resetting mortgages this year.
ASB chief economist Nick Tuffley said inflation was expected to persist above the Reserve Bank's preferred range of 1%-3% for the remainder of the year, with the inflation ‘‘pressure point'' keeping the OCR at 8.25%.
‘‘For many households, budget stress is potentially greater than what the headline inflation figures imply,'' he said yesterday.
The Statistics New Zealand consumer price index, which measures inflation, rose 0.7% for the quarter to March and climbed to 3.4% from the same period last year.
Dr Cullen said ‘‘the pressures on households are real'' and hoped the Government's personal tax-cut programme, to be released in the budget next month, would ‘‘provide relief to families trying to make ends meet''.
‘‘New Zealand cannot be immune to these challenges and the Government certainly can't control the price of food or petrol. But the reality is for many families that these high prices are hitting at the same time that the fallout from the subprime mortgage crisis in the United States is pushing up mortgage rates here,'' Dr Cullen said in a statement yesterday.
Petrol prices were the main culprit for the inflation rise, with prices up 20.5%, and had they remained constant inflation for the year to March would have risen 2.5%, not 3.4%.
Food inflation rose 1.8% for the quarter, housing and household utilities 1% and transport 0.8%.
Mr Tuffley said: ‘‘The things driving inflation up are all the items that are hard to avoid spending money on.
In contrast, many of the items declining in price are in the ‘nice to have' class.''
Westpac economist Brendan O'Donovan said price increases for basic items were ‘‘scary reading'', with food up 5.1%, petrol 20.5%, electricity 6% and rents 3%. He forecast the inflation rate would be close to 4% by the third quarter of the year - not an environment where the Reserve Bank would cut the OCR.
‘‘These increases are putting considerable strain on the weekly household budget. These pressures will not abate any time soon, despite [economic] growth stalling. The economy is operating with scant spare capacity and immense costs pressures.''
