Key findings
- We find that services inflation appears more elevated and broad-based in New Zealand than in a number of other advanced economies.
- In the March 2024 quarter, annual services CPI inflation was 3 percentage points higher than a level that has historically been consistent with headline CPI inflation at target in New Zealand (“benchmark”). This difference is broadly similar to the United States, but higher than in the euro area and Australia.
- The component drivers of services inflation are broad-based in New Zealand, suggesting we are experiencing relatively generalised inflationary pressure in parts of the services sector. While some other advanced economies have a similar dynamic, others appear to be experiencing a relatively larger impulse from relative price shifts.
- Recent inflation dynamics appear to correlate with broad macroeconomic trends abroad. While a weaker macroeconomic backdrop in New Zealand is yet to materially soften inflation in services, disinflation elsewhere should give us confidence that a dampening in overall demand conditions will bring inflation back to target over the medium term.
Why we did this research
Advanced economies globally have experienced a synchronised bout of inflation and subsequent monetary tightening in the post-COVID 19 period, driven by large demand and supply shocks.
While headline inflation rates have been declining for some time, services inflation rates have remained elevated and are falling at a much slower pace. This is highly relevant because the price of services are largely influenced by domestic capacity pressure and price and wage setting behaviour – factors central banks aim to influence.
By comparing services inflation in New Zealand with other advanced economies, we aim to contextualise and learn more about our current domestic inflation dynamics. We also aim to estimate how elevated service sector inflation is and explore the degree of relative price shifts and generalised inflation pressures in New Zealand and abroad.
These comparisons allow us to discern whether the inflation pressures we face are unique or part of a broader global trend, ultimately supporting our understanding of the policy settings required to meet our medium-term inflation target.