Michael Reddell: Former Reserve Bank senior economist discusses the latest inflation numbers

The Consumers Price Index (CPI) has increased 4.1% in the 12 months to the June 2026 quarter, according to figures released by Stats NZ today.

As expected, the increase can be partially contributed to the US-Iran war as the largest upwards contributor to the annual inflation rate was petrol, up 27.5%.

Finance Minister Nicola Willis is labelling annual inflation hitting its highest level in more than two years a “Trump spike”.

Former Reserve Bank senior economist Michael Reddell told Andrew Dickens that economists don't tend to look at the headline numbers but they will be digging through the numbers to find trends. 

"It's a bit like the famous line about democracy, you know, it's not a perfect system, it's just better than any of the alternatives that have been tried, and inflation targeting is a bit like that as well. It's definitely not perfect."

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Episode Transcript

Speaker 1 (00:00):
The only drive show you can trust to ask the questions,
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Andrew dickens on hither due to see Ellen Drive with
one New Zealand and the power of satellite mobile newsorgs.

Speaker 2 (00:14):
That'd be after they were welcome to the program. So
finally we can see the effect of the Middle East war.
Inflation has hit a two year high of four point
one percent. That CPI rise was mostly driven by increases
in the price of fuel. That's war diesel up seventy
one percent, but power and housing, which is internal inflation
or what they like to call tradable inflation and get

(00:39):
a little bit confused, have gone up as well. Anyway,
you're probably experiencing all this yourself, and people are talking
about the cost of living crisis. So Michael Riddell is
a former Reserve Bank senior economist and he joins me
right now afternoon to here, Michael, that's so, is this
what you expected or was it worse or better than
you might have thought?

Speaker 3 (00:58):
I think it's pretty much on census. The range of
economists and forecasters were all in that sort of three
point nine to four point one sort of range.

Speaker 2 (01:07):
The politicians have now got into the blame game, with
Nicola Withers saying well, it's all Donald Trump's fault and
Labor saying no, it's all Nicola Willis's fault. So what
would you say.

Speaker 3 (01:18):
I'd probably be closer than Nicola Willis on this occasion.
I mean, clearly, there's nothing that New Zealand politicians or
the Reserve Bank could do anything do about the diesel
prices or the petrol prices. The underlying issues that are
around inflation are the responsibility of the Reserve Bank. Ultimately,
they're not politicians at all. And it is true that
probably inflation, even if you strip out the petrol prices,

(01:41):
it's not quite as low as we'd like it to be.
And that's part of the reason why the Reserve Bank
made their first ACUR increased last month.

Speaker 2 (01:49):
So what do I need to do now?

Speaker 3 (01:50):
In your opinion, I don't think there's any urgency at
all about raising rates from here. If you strip out
all sorts of things that central banks can't do much about, food, energy,
and government charges, inflation's only just over the midpoint of
the target range. Now that's not what people are experiencing

(02:11):
out there, but that's what the Reserve Bank should be
focusing on. They want to focus on where that inflation
is going to be inter oprating month's time, because monsial
policy moves today take a while to have their impact,
so I think they probably will need to raise rates
a little more at some stage later in the year.
I don't think there's any urgency about that at all.

Speaker 2 (02:31):
Okay, now here's the question, do we actually have the
right system in place for handling the inflation the metric
of just the inflation figure then affecting what we do
with our interest rates. It's a very simplistic thing, but
of course economies are very complex, and people have complained
that we keep on booming and busting on a roller
coaster of macroeconomic policy. Is there a better way of
actually calculating our real position?

Speaker 3 (02:54):
Probably not, Although it's fair to say that central banks
don't pay a lot of attention to the headline inflation numbers,
that they and economists enormous a matter effort and trying
to unpick the numbers and get it what we call
core or trend inflation, and to see how that's evolving
through time. But it's a bit like the famous line
about democracy you know, it's not a perfect system. It's

(03:15):
just better than any of the alternatives that have been tried.
And inflation targeting is a bit like that as well.
It's definitely not perfect. Economies do cycle up and down,
but there isn't really a better alternative on option on
our foot at this stage.

Speaker 2 (03:28):
But if we suddenly crank up the interest rates, we'll
even crank them up slowly. This nascent economic recovery were
in could get squashed as well, which is bad for
the country.

Speaker 3 (03:38):
It could, but that's not likely. So if you look
at the reserve banks forcasts, what they will say is
we will raise interest rates a bit. That will slow
the recovery a little bit, but you know, maybe it'll
slow it from two and a half to two point
two per cent. But those are the sorts of orders
of magnitude that you're thinking about. What you really don't
want is the mess that we got into five years ago.
Right the reserve let inflation get away and then they

(04:02):
had to ramp up interestrates by five hundred basis points
in really only about eighteen months. That did squash the
economy precisely because it had been grossly overheated. What they
should have been doing is moving earlier. If they'd moved earlier,
they wouldn't have needed to have moved so much, and
we would have had a smoother run through the last
few years.

Speaker 2 (04:21):
It's a difficult business, and I thank you for your insight.
That's Michael Riddell, former Reserve Bank senior economists.

Speaker 1 (04:27):
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