Changes in the inflation process in New Zealand

Release date
01/03/2006
Reference
Vol. 69. No. 1. March 2006
Author
Bernard Hodgetts
This article is a revised version of a paper prepared for the Bank of International Settlements Central Bank Economists’ meeting held in Basel in October 2005. The article describes changes in the inflation process in New Zealand over the past two decades. Over time, inflation seems to have become less responsive to its fundamental determinants, such as excess demand pressures in the economy or variations in the exchange rate than was previously the case. This is partly attributed to the reduction and ‘anchoring’ of inflation expectations that followed the adoption of an inflation targeting framework. Some of the determinants of inflation have also changed in profound ways. Low global inflation and downward pressure on prices from countries such as China has muted New Zealand’s inflation rate in recent years. The article notes that wages no longer appear to be a direct driver of inflation in the manner seen in the 1970s and 1980s. Changes in the competitive environment in New Zealand – especially in areas such as retailing – are also considered to have dampened the economy’s ‘inflation response’, although there has so far been relatively little empirical work in New Zealand on this topic.