Speaker 1: Kyota.
Speaker 2: I'm Chelsea Daniels and this is the Front Page, a
Speaker 2: daily podcast presented by the New Zealand Herald. The Reserve
Speaker 2: Bank has revealed the annual inflation rate for twenty twenty
Speaker 2: five was three point one percent. It puts the inflation
Speaker 2: rate outside the Bank's target band of one to three percent.
Speaker 2: While it slowed significantly since the most recent peak of
Speaker 2: seven point three percent in the June quarter of twenty
Speaker 2: twenty two, it has risen every quarter since December twenty
Speaker 2: twenty four. And while economists expect it to sit around
Speaker 2: three to three point one, the Reserve Bank's November prediction
Speaker 2: had it at two point seven. But what does that
Speaker 2: all actually mean? And our dreams of a quick fix
Speaker 2: in twenty twenty six in the Rearview Mirror to Day
Speaker 2: on the front page and Zaid Harold, Business Editor at Large,
Speaker 2: Liam Dan Is with us to break it all down.
Speaker 2: First off, Liam, was this a surprise at all?
Speaker 3: Well, it was slightly worse than the expectations, But the
Speaker 3: economists have been picking mostly a three percent figure, and
Speaker 3: I think one of the economists at ASB had said
Speaker 3: three point one percent, so they got it right. We
Speaker 3: knew it was going to be at the upper end,
Speaker 3: which is not great.
Speaker 2: Obviously, I saw the Reserve banks November prediction had it
Speaker 2: at about two point seven. Were they just being overly optimistic?
Speaker 3: I guess a little bit. But you know, the tough
Speaker 3: thing for the Reserve Bank is that they only make
Speaker 3: forecasts at these sets points in time. You see the
Speaker 3: bank economists will kind of shift their outlook and they're
Speaker 3: sort of picking it a week before it happened, so
Speaker 3: they've seen what's happened to a whole bunch of other
Speaker 3: prices on a monthly basis. Yeah, I mean it's fair
Speaker 3: to say that its inflation is basically being more stubborn
Speaker 3: and more sort of annoying than the Reserve Bank would
Speaker 3: have hoped, and it's gonna be a little bit of
Speaker 3: a problem for the economic recovery in the year ahead.
Speaker 2: I guess what were the main drivers of this increase?
Speaker 3: Yeah, well, if you look at it across the whole year,
Speaker 3: so the whole year giving us the three point one figure.
Speaker 3: The big contributors are still those things that we were
Speaker 3: complaining about last year, what they call household utilities, but
Speaker 3: it's power and rates were the big ones. Big energy
Speaker 3: price rises and rate rises for that December quarter, for
Speaker 3: those three months that we've just had, there was some
Speaker 3: big increases and things like international airfares, which you know,
Speaker 3: a pretty narrow thing, like you either traveled or you didn't,
Speaker 3: so that's kind of a volatile figure. There was some
Speaker 3: increase and petrol prices, that's a volatile figure. And the
Speaker 3: Reserve Bank is allowed to look through some of those
Speaker 3: volatile figures and focus on what it calls core inflation,
Speaker 3: the more solid, steady, steady numbers. But even there, there
Speaker 3: are some signs that they are staying more prices are
Speaker 3: staying more elevated than they'd like to see.
Speaker 2: What does all of this mean for interest rates?
Speaker 3: Basically means that it's more likely, well it's certain that
Speaker 3: they're not going to be cutting interest rates with inflation
Speaker 3: up at these levels, and depending on what happens next,
Speaker 3: but you know, it looks increasingly like we'll see interest
Speaker 3: rates rising this year. So markets are already sort of
Speaker 3: quite aggressively pricing in a rate hike by September and
Speaker 3: by the end and saying that there'll be two hikes
Speaker 3: by the end of the year. They were pricing it
Speaker 3: in before today's number so I could guess, I guess
Speaker 3: you could say there isn't too much surprise for them there.
Speaker 3: Economists have been a bit more cautious, but they're starting
Speaker 3: to move their forecasts and they're sort of saying, well,
Speaker 3: we think we'll see at least one rate rise this year.
Speaker 3: So you know, it's something for people to think about
Speaker 3: when they're looking at their fixed terms over the next
Speaker 3: few months, that you know, it's kind of this as
Speaker 3: good as it gets in terms of lower insustrates, and
Speaker 3: you've got to be careful. You blink and you might
Speaker 3: miss it there on their way up again.
Speaker 2: Well, usually slow and steady wins the race by it, right,
Speaker 2: but we're going slow and steady in terms of rises
Speaker 2: in inflation. What is it going to? What is going
Speaker 2: to be the secret source? Do you think to actually
Speaker 2: get this under control and within that one to three
Speaker 2: band that we're hoping for.
Speaker 3: Yeah, it's a difficult thing because you know, and it's
Speaker 3: been talked about a lot and all this stuff like
Speaker 3: productivity and all the structural problems with the economy, but
Speaker 3: our economy doesn't have a lot of capacity to grow
Speaker 3: very fast before inflation becomes a problem. Again. So there
Speaker 3: were hopes that you know, one of the only upsides
Speaker 3: really from an economic downturn or recession is that prices
Speaker 3: come down and businesses can't afford to put prices up
Speaker 3: or they discount, and so that domestic inflation that you know,
Speaker 3: the price we pay for services in the economy and
Speaker 3: you know, tradees and all that sort of thing that
Speaker 3: comes down. That's non tradable inflation. And it has come down,
Speaker 3: but it's coming down much slower than the economists and
Speaker 3: the Reserve Bank had thought it would, and there's a
Speaker 3: risk that it doesn't have much further to fall because
Speaker 3: as the recovery takes hold, things start picking up again.
Speaker 3: So you know, if that stays where it is, then
Speaker 3: you start having to look at international prices, which we
Speaker 3: don't have any control over, and that's you know, we're
Speaker 3: at risk of all this geopolitical craziness affecting things. Oil
Speaker 3: prices go up or down depending on what's happening in
Speaker 3: the Middle East or what Donald Trump saying. So things
Speaker 3: like oil prices and global commodity prices. You know, it's
Speaker 3: a good it's a good news story for New Zealand
Speaker 3: that beef prices and dairy prices are so strong the
Speaker 3: export dollars are coming in, but that's keeping sort of food.
Speaker 3: You know, the grocery bills high for New Zealanders, especially
Speaker 3: around things like yeah, dairy and meat are still elevated.
Speaker 3: So you know, if commodity prices around the world stay high,
Speaker 3: then you know, there's not much we can do. Really that.
Speaker 3: The mechanism for dealing with it is putting the interest
Speaker 3: rate up, and that unfortunately slows the economy. So it's like,
Speaker 3: how much recovery can we actually sustain before we have
Speaker 3: to sort of put a lid on it. And the
Speaker 3: only way to solve solve that is with real structural change,
Speaker 3: you know, making the economy more efficient and probably leaner
Speaker 3: and meaner. And the government you know, is aware of that.
Speaker 3: I heard Christopa Luxeen talking about that in the State
Speaker 3: of the Nation speech. You know, they sort of talk
Speaker 3: about it in terms of having done the sort of
Speaker 3: patch up job on the economy, the first aid that's
Speaker 3: required on the patient to get it into recovery, and
Speaker 3: now they're starting to look at sort of structural things
Speaker 3: for the future, like adjusting KEW saver to have New
Speaker 3: Zealand is saving more money and all that sort of stuff,
Speaker 3: but that takes time, you know, you know, so just
Speaker 3: relying on this this turn of the economic cycle to
Speaker 3: sort of isn't going to be enough for New Zealand
Speaker 3: to actually get rich. It's just going to provide a
Speaker 3: bit of a stable platform, I think.
Speaker 1: But to all of you, can I say welcome to
Speaker 1: twenty twenty six. It's going to be a truly great year.
Speaker 1: The economy is growing, the kids are almost back at
Speaker 1: school again, and after a great Kiwi summer break, and
Speaker 1: just like Kew's up and down the country, I can
Speaker 1: tell you the National Party is nothing down and getting
Speaker 1: to work. And I guess I have one very very
Speaker 1: simple message for you today, and that is that National
Speaker 1: is fixing the basics and building the future.
Speaker 2: I noticed that in Christopher Luxen's State of the Nation's
Speaker 2: speech as well. It was very much a control what
Speaker 2: you can control narrative, very optimistic but disciplined, realistic, responsible.
Speaker 2: But on the other end, you know, Hipkin said that
Speaker 2: it's all a bunch of mumbo jumbo management speech. But
Speaker 2: in terms of something like this, I think that they're
Speaker 2: going to go out swinging and say, look, with National
Speaker 2: the economy is going to be in safe, mature hands.
Speaker 2: And he's already kind of said, look, there's not going
Speaker 2: to be any smoking gun election promises that cost a
Speaker 2: lot of money. How do you think that will relate
Speaker 2: to what the economy needs at the moment.
Speaker 3: Yeah, I mean, there isn't really time. If they were
Speaker 3: going to do more radical stuff, they needed to do
Speaker 3: more radical stuff in that first year or so if
Speaker 3: they wanted to. So so anything more radical in terms
Speaker 3: of structural changes is going to be really just have
Speaker 3: to be on the policy promises for the next you know,
Speaker 3: the campaign and for the next term. I think they're
Speaker 3: effectively trying to simplify their message. I think they're talking
Speaker 3: about doing the basics and building for the future or
Speaker 3: something like that is the new mantra he's kind of
Speaker 3: picked up. Luxon has picked up on the idea that, look,
Speaker 3: this recovery isn't going to be good enough to solve
Speaker 3: all New Zealand's problems, but it could be a window
Speaker 3: of economic stability and we've got to seize that moment
Speaker 3: to sort of make these changes. And I guess that's
Speaker 3: what they'll be campaigning on. But you know that there
Speaker 3: is those couple of elephants in the room for the
Speaker 3: Prime Minister. One is Donald Trump and the craziness of
Speaker 3: what can happen in the world, because as we saw
Speaker 3: Tariff's last year, that can really derail things for New Zealand.
Speaker 3: I suppose the other one is more on the local front,
Speaker 3: his own coalition partners. In order to win an election.
Speaker 3: Looking at current polling, he's very much needs Winston Peters,
Speaker 3: who's saying he's not voting for an India free trade deal.
Speaker 3: He's going to be opposed to some of National's other
Speaker 3: ideas like looking at selling any state assets so and
Speaker 3: raising the retirement age, so some of the structural things
Speaker 3: National wants to do. It's got a bit of a
Speaker 3: problem there with its coalition partner as well. I think
Speaker 3: so difficult position. I think that's you know why the
Speaker 3: National and the Prime Minister have sort of tried to
Speaker 3: narrow their focus and their mantra. And it's from that
Speaker 3: sort of keep it a simple, stupid school of political marketing,
Speaker 3: which is just keep hammering this message. You know, we're
Speaker 3: fixing the basics and we're slowly and steadily looking at
Speaker 3: stuff for the future. But they're not going to be
Speaker 3: really in a position to deal with that inflation problem
Speaker 3: and the interest rates and the cap on growth this year.
Speaker 3: So while you know, people talked about maybe picking November
Speaker 3: seven was a chance for the economy to keep growing
Speaker 3: and build up some momentum, and that would be good
Speaker 3: for the government, there's also that risk that you get
Speaker 3: your first interest rate rise before the election, which is
Speaker 3: effectively a signal to voters that you know, that's sort
Speaker 3: of as good as it gets.
Speaker 2: People will be listening, are watching this podcast and saying, well,
Speaker 2: three point one percent, Okay, it's outside of the one
Speaker 2: to three percent bracket. I get that, but what does
Speaker 2: that actually mean for their back pocket?
Speaker 3: Yeah? Well, as I mentioned, you know, if you if
Speaker 3: you're not if you weren't taking an international doing an
Speaker 3: international trip, or going on holiday overseas in that fourth quarter,
Speaker 3: then you know you didn't sort of that that didn't
Speaker 3: affect you. Petrol prices were up a bit, but they'll
Speaker 3: be down again. You know, we can see it with
Speaker 3: the well it's happened already this year and oil prices
Speaker 3: coming off, so that stuff moves around. So there is
Speaker 3: serve bankle look through some of that volatility and it'll
Speaker 3: have a core inflation measure, which will still be inside
Speaker 3: the one to three percent band, and that means that
Speaker 3: they probably won't be rushing to put the interest right up.
Speaker 3: So you know, that's why that you're unlikely to see
Speaker 3: any move or you almost certainly won't see any move
Speaker 3: when they make their first call in February, and economists
Speaker 3: are saying we'll probably no moves in the first half
Speaker 3: of the year. But you know, it just does mean
Speaker 3: that those hikes are coming. It also means really that
Speaker 3: I don't think the cost of living, the idea that
Speaker 3: there's a cost of living crisis and things isn't really
Speaker 3: going to go away for a lot of New Zealanders.
Speaker 3: So I think it's you know, it's there's going to
Speaker 3: be a lot of good economic data as we start
Speaker 3: to get back into growth. We're going to have figures
Speaker 3: about manufacturing and you know, a lot of stuff's going
Speaker 3: to look like it's improving. Hopefully that will flow through
Speaker 3: to the jobs market and we'll see the unemployment rate
Speaker 3: sort of peak and come down, and then you start
Speaker 3: to see labor you know, prices like wages start to
Speaker 3: go up at that point, which is sort of a
Speaker 3: good thing. But then all of a sudden we hit
Speaker 3: the capacity and they start contributing to inflation. So, you know,
Speaker 3: and really the only way that most New Zealanders will
Speaker 3: feel better off is when their wages start to get
Speaker 3: ahead of the inflation rate. And that just doesn't look
Speaker 3: like it's going to happen particularly soon.
Speaker 4: This time last year, Christopher Luckxen confidently predicted that the
Speaker 4: economy was in recovery, unemployment had peaked, and that things
Speaker 4: were going to get better. Since then, we saw the
Speaker 4: economy shrink, more people lose their jobs, the government's finances
Speaker 4: deteriorate further, and the economic going get even harder for
Speaker 4: New Zealand families. Christopher Luxean is out of touch with
Speaker 4: New Zealanders. Holding on to the very very last possible
Speaker 4: date he could have called the election shows how desper pretty.
Speaker 2: I just want to know, Liam, how much of my
Speaker 2: eggs and cheese and milk going to cost within the
Speaker 2: next market? Is that what inflation effects? Yeah?
Speaker 3: I think groceries and power prices and maybe rates are
Speaker 3: some of the things that you know, everybody's everybody's dealing with. Certainly,
Speaker 3: certainly groceries and power prices. Look, dairy prices have have
Speaker 3: come off a bit internationally stabilized. I think we could
Speaker 3: see butter and some other dairy things that the supermarket
Speaker 3: come down a little bit, but not that much more. Unfortunately,
Speaker 3: beef is still going great guns. There's just there's this
Speaker 3: enormous demand for protein around the world, which is good
Speaker 3: for New Zealand in terms of you know, the export prices,
Speaker 3: all the weird you know stuff you see online with
Speaker 3: the you know, workout bros and everything, and and and
Speaker 3: and just consuming all this protein and protein being added
Speaker 3: to everything is actually is.
Speaker 2: That your twenty twenty six goal lam?
Speaker 3: Yeah, now a Jim Bro more protein a little bit,
Speaker 3: but as much as a middle aged old fella can be.
Speaker 3: But you know, but that has driven up demand for protein. So,
Speaker 3: you know, beef lamb are record levels, dairy has been
Speaker 3: at record levels. It's come off a bit, but you know,
Speaker 3: so there's not a lot of relief coming there other
Speaker 3: than that that you know, will that money is flying
Speaker 3: into the economy and so it sort of swings and roundabouts.
Speaker 3: You'd hope that domestic inflation had come down, but you know,
Speaker 3: if things pick up, it may be that we're in
Speaker 3: an era of slightly elevated inflation. Which means that you know,
Speaker 3: the Reserve Bank ultimately will have to act.
Speaker 2: And what will the reserve bank do? What can can
Speaker 2: it do?
Speaker 3: Yeah, it really is just that monetary policy leader be
Speaker 3: very unpopular if they start lifting rates already. But when
Speaker 3: if inflation stays outside that target van for an extended period,
Speaker 3: that's their mandate. They have to do that. You know,
Speaker 3: they're legally required and they're only required to look at inflation,
Speaker 3: you know, so unemployment is considered, but it's no longer
Speaker 3: part of the mandate. They have a single mandate, which
Speaker 3: means that you know, even if unemployment hasn't really come
Speaker 3: down that much and the jobs market hasn't improved that much,
Speaker 3: we could see interest rates rising, you know, before we
Speaker 3: see the real results there, and that that would be
Speaker 3: a shame. That just that just shows you how much
Speaker 3: inflation can curtail a recovery and really just highlights again
Speaker 3: that it's you know, you hear economists talk about capacity
Speaker 3: in the economy and what the capacity is for the economy.
Speaker 3: I like the term speed limit, and I've heard other
Speaker 3: economists feel about it in terms of a speed limit.
Speaker 3: You know, our economy has a relatively low speed limit.
Speaker 3: It can only grow at about up two percent or around
Speaker 3: that level before it overheats and inflation comes through. And
Speaker 3: you know, we may be seeing that you know already
Speaker 3: and that two percent isn't quite enough to be transformative
Speaker 3: in terms of wealth creation, the kind of wealth creation
Speaker 3: that the economy needs to get really in the right
Speaker 3: shape and you know, get the treasury coffers into good
Speaker 3: shape and get people's savings up and all that stuff.
Speaker 3: So that's why you'll keep hearing people talk about the
Speaker 3: need for structural change, and I expect you'll hear the
Speaker 3: Prime Minister keep talking about it too.
Speaker 2: And lastly, Liam, I know that we didn't quite thrive
Speaker 2: in twenty twenty five, but do you have a nice
Speaker 2: little catch phrase for twenty twenty six or is it
Speaker 2: just like let's all keep our heads out of the
Speaker 2: water or something for twenty twelve.
Speaker 3: Or well, you know, my analogy is kind of like
Speaker 3: twenty twenty six, there should be some relief, it should
Speaker 3: still feel good. I'm gonna got one that rhymes. But
Speaker 3: if you're talking about heads, it's kind of that idea
Speaker 3: that happiness is banging your head against the wall and
Speaker 3: then stopping. And so because we're no longer banging our
Speaker 3: head against the wall. It will feel better. It's going
Speaker 3: to feel better than last year, and.
Speaker 2: That's you've still got a bit of a bruise.
Speaker 3: Yeah, And it's not going to solve any of our
Speaker 3: more existential problems, you know. So how long that relief
Speaker 3: from things feeling better lasts will really determine, so things
Speaker 3: like how the election goes. So you're going to see
Speaker 3: business and consumer confidence looking good relative to where they were.
Speaker 3: But at some point, if there's a cap on where
Speaker 3: the recovery goes, that relief is going to sort of
Speaker 3: wear out, I guess, and people are going to be thinking,
Speaker 3: is that it.
Speaker 2: So no quick fix for twenty twenty six.
Speaker 3: Yeah, that's a good one. I should have thought of that.
Speaker 2: Thanks for joining us, Liam.
Speaker 3: Cheers, Chelsea.
Speaker 2: That's it for this episode of the Front Page. You
Speaker 2: can read more about today's stories and extensive news coverage
Speaker 2: at enzidherld dot co dot nz. The Front Page is
Speaker 2: hosted and produced by me Chelsea Daniels Kine. Dickie is
Speaker 2: our studio operator, Richard Martin, our producer and editor, and
Speaker 2: our executive producer is Jane Ye. Follow the Front Page
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Speaker 2: join us next time for another look beyond the headlines.