Inflation has climbed to 4.1%, but the headline number doesn't tell the whole story. While inflation remains above the Reserve Bank's target range, the bigger question is what's driving it, what it means for interest rates, and whether the worst is still to come.
Inflation Hits 4.1%, But Petrol Is Driving the Story
Although inflation has reached 4.1% over the past 12 months, much of that increase has been driven by one key factor: petrol.
According to the figures discussed in the episode, petrol prices have risen 27.5% over the past year and accounted for almost a quarter of the overall inflation figure.
Without higher petrol and diesel prices, annual inflation would have been around 2.9%, placing it back within the Reserve Bank’s target band.
Other contributors to inflation included:
- Electricity prices, up 12%
- Local authority rates, up 8.8%
- New housing construction costs, up 2.7%
While these areas have also added pressure, petrol remains the standout contributor.
What's Driving Inflation?
One of the key points raised in the discussion is that inflation data is always looking backwards.
The 4.1% figure reflects the past 12 months rather than what’s happening in the economy today. Because inflation data is historical, it doesn’t fully capture more recent events or changing market conditions.
Michael also points out that global instability continues to create pressure on oil prices, which then flows through into petrol, transport and eventually the wider economy.
Is This Different From 2021?
Today’s inflation looks very different from what New Zealand experienced a few years ago.
In 2021, inflation was largely driven by strong consumer demand. Today, much of the pressure is coming from supply-side factors, particularly higher oil prices.
That raises an important question: if households aren’t driving the inflation, are higher interest rates the right response? As mortgage rates rise, many homeowners are paying more to combat inflation that’s largely outside their control.
What Does This Mean for Interest Rates?
With inflation remaining above target, further OCR increases still appear likely.
Although the Reserve Bank forecast inflation would be close to this level, the latest figures reinforce expectations that interest rates could continue rising before the end of the year.
Wholesale funding costs also moved higher after the inflation figures were released. Because wholesale funding influences how banks source money, higher funding costs can eventually flow through to mortgage rates.
For borrowers, that means mortgage rates could continue edging higher, even if much of the current inflation is being driven by higher petrol prices.
Could Inflation Improve Naturally?
Could inflation ease without further OCR increases?
The Reserve Bank’s forecasts suggest inflation could return to around 2% by the middle of 2027.
If much of the current inflation is being driven by temporary supply-side pressures, there is an argument for allowing those pressures to work their way through the economy rather than placing additional pressure on homeowners and businesses through higher interest rates.
With inflation expected to ease over time, the challenge is balancing price stability with the impact higher interest rates can have on households, businesses and the wider economy.
Key Takeaways
- Inflation has risen to 4.1% over the past 12 months.
- Petrol prices increased 27.5% and accounted for almost a quarter of overall inflation.
- Without higher petrol and diesel prices, inflation would have been around 2.9%.
- Electricity, council rates and construction costs also contributed to higher inflation.
- The hosts believe current inflation is primarily being driven by supply-side pressures rather than strong consumer demand.
- Further OCR increases remain possible if inflation stays above target.
- Higher mortgage costs reduce household spending and place additional pressure on businesses.
- The Reserve Bank’s forecasts discussed in the episode suggest inflation could return to around 2% by the middle of 2027.
Next Steps
Concerned about what rising inflation and interest rates could mean for your mortgage? Speak with the Lighthouse Mortgages team to review your lending options and prepare for what’s ahead.
If you’d like to watch more, check out these other episodes below.
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