Skip to content

Our central bank is picking that inflation will have hit a new 32-year high of 7.5% when December quarter figures are released in the coming week. If it's right, expect a further hefty 75 point rise to the Official Cash Rate next month


By David Hargreaves,

There are some doubters out there who struggle, unkindly, to believe that the Reserve Bank ever gets anything right.

But just about everybody will agree that they hope like hell the RBNZ is going to be wrong with its pick for the annual inflation rate as at the end of December. We'll all find out on Wednesday, January 25, when Stats NZ unveils the December quarter figures. Grab your popcorn, this is the only show in town.

It's all becoming reasonably high stakes stuff. As long as inflation keeps rising (or at very least staying stubbornly high) we can expect to keep getting flogged by more interest rate hikes from a central bank that's hell bent on knocking back inflationary expectations. And the more interest rates go up the more we get squeezed. And the more there is the risk that the economy completely tanks.

Okay, some context first.

Let's cast our minds back to late November 2022. A big talking point in a November 2022 RBNZ Monetary Policy Statement that was littered with big talking points was the central bank's pick for annual inflation to actually INCREASE again in the December quarter to 7.5% (from 7.2% in September), which would be a fresh 32-year high, and hold that increased level (IE 7.5%) through the March quarter before then starting to subside though the rest of 2023, easing to (a still-far-too-high) 5% by the end of the year.

Bear in mind that from pretty early in 2022 the perceived wisdom was that we would see inflation peak in the middle of that year. Maybe we just about did. But the RBNZ is predicting that we didn't. And if inflation really will still be running at 7.5% as of March then this will mean 'peak price hike' has been with us for nearly a year longer than anticipated.

We shouldn't, however, be shocked if such a scenario comes to pass. The reality is that both the height and duration of this inflation spike that we are enduring has been consistently under-estimated since it first started showing its ugly face.

At this stage it is worth running over some of the recent inflation history, because it is spectacular.

If we go back just two years to the December 2020 quarter, the annual rate of inflation was only 1.4%. That was it. Hardly worth mentioning. Our rate of inflation was somewhat BELOW the RBNZ's explicit target of 2% and at the lower end of the officially targeted 1% to 3% range.

A year and various supply chain struggles and other Covid-related woes later and the annual rate of inflation had rocketed to 5.9% by the December quarter of 2021.

So, into 2022 and by the end of the March quarter the inflation rate had hit 6.9%, increased again to 7.3% in the June quarter and then eased just oh so slightly to 7.2% in the September quarter. However, its possibly not an exaggeration to say that September quarter figure was the nastiest shock of the lot. That's because there was widespread belief ahead of the release of the figures that we would start to see some substantive signs of easing prices. Well, not a bit of it.

Applying some hindsight to the September figures, we can see that the (inflationary) impact of the re-opening of our borders had been hugely under-estimated ahead of time. Massive rises in airfares had a big hand in much of the upside shock of the September quarter figures.

This is all extremely pertinent when considering the December quarter 2022 and the first quarter of 2023. It's our first summer for three years with open borders. People are coming. They are spending. Our re-opened tourism sector is struggling to find staff in our super hot labour market. And then of course we are spending up to go on long-deferred overseas trips. It's an inflationary cocktail.

So, a big question for the December quarter inflation figures, which will also apply to those for March 2023, is how much of an impact all of this will have in terms of price rises?

The RBNZ, having been caught out by the extent of the open-border impact in the September quarter clearly doesn't want to be caught out again.

Which brings us back to the beginning, and will the RBNZ be right about 7.5% inflation? If it is this will shake the markets. The RBNZ will have a bright green light to go ahead with a 75 point rise to the Official Cash Rate (which would take it up to 5%) in the next interest rate review on February 22. We may see more upward movements in retail rates - particularly mortgage rates.

However...If the RBNZ is wrong, the markets will take this as a cue to start easing wholesale interest rates, while economists will be talking about there being no need for the OCR to go anything like as high at the 5.5% the RBNZ has indicated (by the middle of this year). Indeed if there are real signs of an easing in inflation, expect the talk to shift rapidly to when the OCR is going to be reduced.

The other key point to note here is the breakdown between the so-called 'non-tradeable' inflation - effectively domestically-generated price rises and 'tradeable' inflation, which includes imported inflation from things such as oil. The RBNZ's most keenly interested in the 'non-tradeable' figure, since that's the one it can directly influence with its OCR movements.

For the December quarter, the RBNZ is picking 'non-tradeable' inflation to be 7%. So, even if the 'headline' CPI figure comes in less than the RBNZ's forecast 7.5%, if the domestically-generated inflation's running hotter than 7% then you can again presume the RBNZ's likely to push pedal to the metal and go for that 75-point OCR hike.

In terms of what other economists reckon is going to happen, I didn't have all the picks in front of me at time of writing - but there was an unusually wide variance in the ones I had seen. I've seen picks ranging from 6.9% to 7.4%. The wide variety of views on where the figure will land paints its own picture about what uncertainty there is out there and how volatile the situation is.

It's just a number. But my goodness, how important that number will be in the context of what happens next.

This story was originally published on and has been republished here with permission.