Inflation in New Zealand's Trading Partner Economies
Ranchhod, Satish, The Reserve Bank of New Zealand Bulletin
Inflation pressures in other economies have important implications for inflation, activity and monetary policy in New Zealand. This article examines inflation trends in New Zealand's trading partner economies over the past decade. Looking at a range of inflation measures, we observe that the low inflation seen in our trading partner economies in the mid-1990s has now given way to a period of higher inflation. Increases in inflation rates have been seen in all regions, with particularly notable increases in Asian economies.
Higher inflation in our trading partner economies has been related to strength in global growth and the closer integration of Asia and emerging markets into the global economy. These developments have contributed to increased demands on productive resources and strong growth in commodity prices. Such increases have been reflected in higher consumer prices and export prices in our trading partner economies. In New Zealand, these developments have contributed to a more challenging environment for monetary policy, with stronger consumer price inflation and increased headwinds for growth.
Inflation is ultimately a monetary phenomenon. In recent decades, the successful implantation of monetary policy aimed at price stability has contributed to marked declines in the level and variability of inflation in New Zealand and other developed economies (figure 1). Policy-makers' preferences for low inflation have also contributed to an improvement in inflation outcomes in Asian economies since the early 1990s. But while monetary policy and the preferences of policy-makers will determine an economy's long-run rate of inflation, in the short run inflation can be influenced by a range of factors such as the strength of global activity. Such short-run influences can have important implications for activity and monetary policy, particularly in small open economies such as New Zealand. This article examines inflation in other economies over the past decade, focusing on the increases seen in inflation since 2004. It considers the factors that have contributed to these increases, as well as the implications for prices and activity in New Zealand.
Previous work at the Reserve Bank of New Zealand has also examined such short-run inflation influences. When looking at global inflation, Hunt (2007) found he increased integration of Asia and emerging markets into the global economy had helped to dampen global inflation pressures in the mid-1990s, but that this effect appeared to be dissipating. Hodgetts (2006) looked at changes in New Zealand's inflation process. This work found that increased trade with Asia and emerging markets has been one factor that has helped to dampen inflation pressures in New Zealand since the 1990s. (2)
This article complements the work of Hunt and Hodgetts by looking at a range of inflation measures and accounting for more recent development in New Zealand and abroad. We observe that the benign inflation pressures other economies had been experiencing have now dissipated, with global inflation creeping upwards since 2004. This increase has been associated with strength in global economic activity, particularly in Asia and emerging markets. Strength in activity has contributed to higher commodity prices and rising costs of production in many regions.
Increases in global inflation have contributed to a more challenging environment for monetary policy in New Zealand, adding to domestic inflation pressures while dampening domestic activity. In this environment, the Reserve Bank of New Zealand remains focused on our medium-term inflation goals and ensuring inflation expectations remain anchored.
The article is structured as follows. Section 2 discusses why we are concerned about inflation in other economies. Section 3 examines inflation developments in our trading partner economies, looking at a range of inflation measures. Section 4 examines what has contributed to the changes in inflation over the past decade. …