In our recent discussion with Kiwibank Chief Economist Jarrod Kerr, we explored whether New Zealand is heading into stagflation and what that could mean for the economy.
What is stagflation?
Stagflation is typically defined as a period of high inflation, high unemployment, and low economic growth – a combination economists “don’t like” because these forces usually don’t occur together.
While the current environment in New Zealand shares some similarities, Jarrod Kerr is clear that we’re not there yet:
- Inflation is expected to be high in the near term
- Growth has been weak
- There are signs of rising unemployment
However, the degree matters. Kerr notes that while these elements exist, they’re not at the extreme levels seen historically – and importantly, he doesn’t expect stagflation to define the year ahead.
Instead, what we may be seeing is a short-term inflation shock, rather than a prolonged stagflationary period.
Why the stagflation fears are surfacing now
So why is the idea that New Zealand is heading into stagflation gaining traction?
A big driver is the oil shock and rising fuel costs, which are feeding directly into inflation. Kerr highlights that:
- Petrol and diesel prices are pushing inflation higher
- These cost pressures reduce consumer spending (demand destruction)
- The economy may contract again in the near term
“We could see a contraction in the economy this quarter… and it’s not pretty.”
This creates a challenging environment where:
- Costs are rising
- Spending is falling
- Growth is stalling
But importantly, this is being driven by supply-side shocks, not an overheated economy – which changes how policymakers respond.
Why this isn’t the 1970s all over again
The last major period of stagflation occurred in the 1970s, driven by oil shocks and runaway inflation.
However, Kerr points out some key differences today:
- New Zealand is less dependent on oil than it was historically
- The Reserve Bank now actively targets inflation
- Inflation volatility has been significantly lower over the past 30-40 years
Back then, inflation and unemployment both hit double digits, creating a far more severe economic environment than what we’re seeing today.
In contrast, today’s system is more structured and central banks are more proactive in managing inflation over the medium term, not reacting to short-term spikes.
What happens next:
One of the most important takeaways is how central banks are likely to respond.
Despite rising inflation, Kerr suggests that:
- Interest rate hikes are unlikely in this environment
- The Reserve Bank will “look through” short-term inflation
- There is actually a greater likelihood of rate cuts than hikes
Why? Because the economy is already fragile.
New Zealand has:
- Barely recovered from a recent recession
- Experienced a short-lived bounce
- Begun slipping back toward contraction
“We’ve barely bounced out of the recession… and here we are just falling into another one.”
This means tightening policy could do more harm than good.
The real risk: fuel supply and economic disruption
Beyond inflation and growth, Kerr highlights a more immediate concern – fuel supply.
Key risks include:
- Limited diesel and jet fuel reserves
- Dependence on imported refined fuel
- Potential disruptions from global supply chains
If supply becomes constrained, the impact could be severe:
- Essential industries (like farming and transport) are affected
- Economic activity slows dramatically
- The economy could “come to a grinding halt”
“If we’re running low on petrol and diesel, that’s when the economy really does come to a grinding halt.”
This shifts the conversation from price-driven inflation to availability-driven risk.
What this means for markets and investors
Despite the noise, markets haven’t reacted dramatically yet.
- Equity markets are only modestly down
- Oil prices have risen, but not to panic levels
- Investor portfolios have seen some volatility, but nothing extreme
Markets are not currently pricing in a worst-case scenario and that’s important context for investors reacting to short-term movements.
Key takeaways
- Stagflation = high inflation, high unemployment, low growth – but New Zealand isn’t fully there
- Current conditions are more likely a short-term inflation shock
- Oil and fuel supply are the biggest drivers of current uncertainty
- The Reserve Bank is likely to look through inflation and avoid rate hikes
- There is a greater chance of rate cuts than increases
- The biggest risk is fuel supply disruption, not just rising prices
- The economy may weaken further before it recovers
- Long-term, the expectation is that New Zealand will recover – it’s a matter of timing
Next steps
If you want help understanding how this economic environment impacts your mortgage, KiwiSaver, or investments, Lighthouse Financial can guide you through your next move.
If you’d like to watch more, check out this other episode below.
For a no obligation discussion to see how we can help you on the path to wealth, please contact us.
Disclaimer:
The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
