Kyota.
I'm Chelsea Daniels and this is the Front Page, a daily podcast presented by the New Zealand Herald. The Reserve Bank has revealed the annual inflation rate for twenty twenty five was three point one percent. It puts the inflation rate outside the Bank's target band of one to three percent. While it slowed significantly since the most recent peak of seven point three percent in the June quarter of twenty twenty two, it has risen every quarter since December twenty
twenty four. And while economists expect it to sit around three to three point one, the Reserve Bank's November prediction had it at two point seven. But what does that all actually mean? And our dreams of a quick fix in twenty twenty six in the Rearview Mirror to Day on the front page and Zaid Harold, Business Editor at Large, Liam Dan Is with us to break it all down. First off, Liam, was this a surprise at all?
Well, it was slightly worse than the expectations, But the economists have been picking mostly a three percent figure, and I think one of the economists at ASB had said three point one percent, so they got it right. We knew it was going to be at the upper end, which is not great.
Obviously, I saw the Reserve banks November prediction had it at about two point seven. Were they just being overly optimistic?
I guess a little bit. But you know, the tough thing for the Reserve Bank is that they only make forecasts at these sets points in time. You see the bank economists will kind of shift their outlook and they're sort of picking it a week before it happened, so they've seen what's happened to a whole bunch of other
prices on a monthly basis. Yeah, I mean it's fair to say that its inflation is basically being more stubborn and more sort of annoying than the Reserve Bank would have hoped, and it's gonna be a little bit of a problem for the economic recovery in the year ahead.
I guess what were the main drivers of this increase?
Yeah, well, if you look at it across the whole year, so the whole year giving us the three point one figure. The big contributors are still those things that we were complaining about last year, what they call household utilities, but
it's power and rates were the big ones. Big energy price rises and rate rises for that December quarter, for those three months that we've just had, there was some big increases and things like international airfares, which you know, a pretty narrow thing, like you either traveled or you didn't, so that's kind of a volatile figure. There was some
increase and petrol prices, that's a volatile figure. And the Reserve Bank is allowed to look through some of those volatile figures and focus on what it calls core inflation, the more solid, steady, steady numbers. But even there, there are some signs that they are staying more prices are staying more elevated than they'd like to see.
What does all of this mean for interest rates?
Basically means that it's more likely, well it's certain that they're not going to be cutting interest rates with inflation up at these levels, and depending on what happens next, but you know, it looks increasingly like we'll see interest rates rising this year. So markets are already sort of quite aggressively pricing in a rate hike by September and by the end and saying that there'll be two hikes
by the end of the year. They were pricing it in before today's number so I could guess, I guess you could say there isn't too much surprise for them there. Economists have been a bit more cautious, but they're starting to move their forecasts and they're sort of saying, well, we think we'll see at least one rate rise this year.
So you know, it's something for people to think about when they're looking at their fixed terms over the next few months, that you know, it's kind of this as good as it gets in terms of lower insustrates, and you've got to be careful. You blink and you might miss it there on their way up again.
Well, usually slow and steady wins the race by it, right, but we're going slow and steady in terms of rises in inflation. What is it going to? What is going to be the secret source? Do you think to actually get this under control and within that one to three band that we're hoping for.
Yeah, it's a difficult thing because you know, and it's been talked about a lot and all this stuff like productivity and all the structural problems with the economy, but our economy doesn't have a lot of capacity to grow
very fast before inflation becomes a problem. Again. So there were hopes that you know, one of the only upsides really from an economic downturn or recession is that prices come down and businesses can't afford to put prices up or they discount, and so that domestic inflation that you know, the price we pay for services in the economy and you know, tradees and all that sort of thing that
comes down. That's non tradable inflation. And it has come down, but it's coming down much slower than the economists and the Reserve Bank had thought it would, and there's a risk that it doesn't have much further to fall because as the recovery takes hold, things start picking up again. So you know, if that stays where it is, then you start having to look at international prices, which we don't have any control over, and that's you know, we're
at risk of all this geopolitical craziness affecting things. Oil prices go up or down depending on what's happening in the Middle East or what Donald Trump saying. So things like oil prices and global commodity prices. You know, it's a good it's a good news story for New Zealand that beef prices and dairy prices are so strong the export dollars are coming in, but that's keeping sort of food.
You know, the grocery bills high for New Zealanders, especially around things like yeah, dairy and meat are still elevated. So you know, if commodity prices around the world stay high, then you know, there's not much we can do. Really that. The mechanism for dealing with it is putting the interest rate up, and that unfortunately slows the economy. So it's like, how much recovery can we actually sustain before we have
to sort of put a lid on it. And the only way to solve solve that is with real structural change, you know, making the economy more efficient and probably leaner and meaner. And the government you know, is aware of that. I heard Christopa Luxeen talking about that in the State
of the Nation speech. You know, they sort of talk about it in terms of having done the sort of patch up job on the economy, the first aid that's required on the patient to get it into recovery, and now they're starting to look at sort of structural things for the future, like adjusting KEW saver to have New Zealand is saving more money and all that sort of stuff, but that takes time, you know, you know, so just relying on this this turn of the economic cycle to
sort of isn't going to be enough for New Zealand to actually get rich. It's just going to provide a bit of a stable platform, I think.
But to all of you, can I say welcome to twenty twenty six. It's going to be a truly great year. The economy is growing, the kids are almost back at school again, and after a great Kiwi summer break, and just like Kew's up and down the country, I can tell you the National Party is nothing down and getting to work. And I guess I have one very very simple message for you today, and that is that National is fixing the basics and building the future.
I noticed that in Christopher Luxen's State of the Nation's speech as well. It was very much a control what you can control narrative, very optimistic but disciplined, realistic, responsible. But on the other end, you know, Hipkin said that it's all a bunch of mumbo jumbo management speech. But in terms of something like this, I think that they're going to go out swinging and say, look, with National the economy is going to be in safe, mature hands.
And he's already kind of said, look, there's not going to be any smoking gun election promises that cost a lot of money. How do you think that will relate to what the economy needs at the moment.
Yeah, I mean, there isn't really time. If they were going to do more radical stuff, they needed to do more radical stuff in that first year or so if they wanted to. So so anything more radical in terms of structural changes is going to be really just have to be on the policy promises for the next you know, the campaign and for the next term. I think they're
effectively trying to simplify their message. I think they're talking about doing the basics and building for the future or something like that is the new mantra he's kind of picked up. Luxon has picked up on the idea that, look, this recovery isn't going to be good enough to solve all New Zealand's problems, but it could be a window of economic stability and we've got to seize that moment to sort of make these changes. And I guess that's
what they'll be campaigning on. But you know that there is those couple of elephants in the room for the Prime Minister. One is Donald Trump and the craziness of what can happen in the world, because as we saw Tariff's last year, that can really derail things for New Zealand. I suppose the other one is more on the local front, his own coalition partners. In order to win an election.
Looking at current polling, he's very much needs Winston Peters, who's saying he's not voting for an India free trade deal. He's going to be opposed to some of National's other ideas like looking at selling any state assets so and raising the retirement age, so some of the structural things National wants to do. It's got a bit of a problem there with its coalition partner as well. I think so difficult position. I think that's you know why the National and the Prime Minister have sort of tried to
narrow their focus and their mantra. And it's from that sort of keep it a simple, stupid school of political marketing, which is just keep hammering this message. You know, we're fixing the basics and we're slowly and steadily looking at stuff for the future. But they're not going to be really in a position to deal with that inflation problem and the interest rates and the cap on growth this year.
So while you know, people talked about maybe picking November seven was a chance for the economy to keep growing and build up some momentum, and that would be good for the government, there's also that risk that you get your first interest rate rise before the election, which is effectively a signal to voters that you know, that's sort of as good as it gets.
People will be listening, are watching this podcast and saying, well, three point one percent, Okay, it's outside of the one to three percent bracket. I get that, but what does that actually mean for their back pocket?
Yeah? Well, as I mentioned, you know, if you if you're not if you weren't taking an international doing an international trip, or going on holiday overseas in that fourth quarter, then you know you didn't sort of that that didn't affect you. Petrol prices were up a bit, but they'll be down again. You know, we can see it with the well it's happened already this year and oil prices
coming off, so that stuff moves around. So there is serve bankle look through some of that volatility and it'll have a core inflation measure, which will still be inside the one to three percent band, and that means that they probably won't be rushing to put the interest right up. So you know, that's why that you're unlikely to see any move or you almost certainly won't see any move when they make their first call in February, and economists are saying we'll probably no moves in the first half
of the year. But you know, it just does mean that those hikes are coming. It also means really that I don't think the cost of living, the idea that there's a cost of living crisis and things isn't really going to go away for a lot of New Zealanders. So I think it's you know, it's there's going to be a lot of good economic data as we start to get back into growth. We're going to have figures about manufacturing and you know, a lot of stuff's going
to look like it's improving. Hopefully that will flow through to the jobs market and we'll see the unemployment rate sort of peak and come down, and then you start to see labor you know, prices like wages start to go up at that point, which is sort of a good thing. But then all of a sudden we hit the capacity and they start contributing to inflation. So, you know, and really the only way that most New Zealanders will feel better off is when their wages start to get
ahead of the inflation rate. And that just doesn't look like it's going to happen particularly soon.
This time last year, Christopher Luckxen confidently predicted that the economy was in recovery, unemployment had peaked, and that things were going to get better. Since then, we saw the economy shrink, more people lose their jobs, the government's finances deteriorate further, and the economic going get even harder for New Zealand families. Christopher Luxean is out of touch with
New Zealanders. Holding on to the very very last possible date he could have called the election shows how desper pretty.
I just want to know, Liam, how much of my eggs and cheese and milk going to cost within the next market? Is that what inflation effects? Yeah?
I think groceries and power prices and maybe rates are some of the things that you know, everybody's everybody's dealing with. Certainly, certainly groceries and power prices. Look, dairy prices have have come off a bit internationally stabilized. I think we could see butter and some other dairy things that the supermarket come down a little bit, but not that much more. Unfortunately,
beef is still going great guns. There's just there's this enormous demand for protein around the world, which is good for New Zealand in terms of you know, the export prices, all the weird you know stuff you see online with the you know, workout bros and everything, and and and and just consuming all this protein and protein being added to everything is actually is.
That your twenty twenty six goal lam?
Yeah, now a Jim Bro more protein a little bit, but as much as a middle aged old fella can be. But you know, but that has driven up demand for protein. So, you know, beef lamb are record levels, dairy has been at record levels. It's come off a bit, but you know, so there's not a lot of relief coming there other than that that you know, will that money is flying into the economy and so it sort of swings and roundabouts.
You'd hope that domestic inflation had come down, but you know, if things pick up, it may be that we're in an era of slightly elevated inflation. Which means that you know, the Reserve Bank ultimately will have to act.
And what will the reserve bank do? What can can it do?
Yeah, it really is just that monetary policy leader be very unpopular if they start lifting rates already. But when if inflation stays outside that target van for an extended period, that's their mandate. They have to do that. You know, they're legally required and they're only required to look at inflation, you know, so unemployment is considered, but it's no longer
part of the mandate. They have a single mandate, which means that you know, even if unemployment hasn't really come down that much and the jobs market hasn't improved that much, we could see interest rates rising, you know, before we see the real results there, and that that would be
a shame. That just that just shows you how much inflation can curtail a recovery and really just highlights again that it's you know, you hear economists talk about capacity in the economy and what the capacity is for the economy. I like the term speed limit, and I've heard other economists feel about it in terms of a speed limit. You know, our economy has a relatively low speed limit. It can only grow at about up two percent or around
that level before it overheats and inflation comes through. And you know, we may be seeing that you know already and that two percent isn't quite enough to be transformative in terms of wealth creation, the kind of wealth creation that the economy needs to get really in the right shape and you know, get the treasury coffers into good shape and get people's savings up and all that stuff.
So that's why you'll keep hearing people talk about the need for structural change, and I expect you'll hear the Prime Minister keep talking about it too.
And lastly, Liam, I know that we didn't quite thrive in twenty twenty five, but do you have a nice little catch phrase for twenty twenty six or is it just like let's all keep our heads out of the water or something for twenty twelve.
Or well, you know, my analogy is kind of like twenty twenty six, there should be some relief, it should still feel good. I'm gonna got one that rhymes. But if you're talking about heads, it's kind of that idea that happiness is banging your head against the wall and then stopping. And so because we're no longer banging our head against the wall. It will feel better. It's going to feel better than last year, and.
That's you've still got a bit of a bruise.
Yeah, And it's not going to solve any of our more existential problems, you know. So how long that relief from things feeling better lasts will really determine, so things like how the election goes. So you're going to see business and consumer confidence looking good relative to where they were. But at some point, if there's a cap on where the recovery goes, that relief is going to sort of wear out, I guess, and people are going to be thinking, is that it.
So no quick fix for twenty twenty six.
Yeah, that's a good one. I should have thought of that.
Thanks for joining us, Liam.
Cheers, Chelsea.
That's it for this episode of the Front Page. You can read more about today's stories and extensive news coverage at enzidherld dot co dot nz. The Front Page is hosted and produced by me Chelsea Daniels Kine. Dickie is our studio operator, Richard Martin, our producer and editor, and our executive producer is Jane Ye. Follow the Front Page on the iheartapp or wherever you get your podcasts, and join us next time for another look beyond the headlines.