1990 vs 2011: inflation high but a different economic environment

Those feeling the pinch probably didn't need to be told that inflation reached a new high recently. The consumer price index rose 1.0 percent for the June 2011 quarter —pushing the annual rate to 5.3, the highest since 1990.

So just what drove that inflationary peak 21 years ago, and how do conditions now compare to the situation then?

Here's what two economists had to say:

Christina Leung, ASB economist

 While annual headline CPI was boosted by a GST increase both in 1990 and now, the environment is quite different.

Back in 1990, NZ was just coming out of a highly inflationary environment having eliminated price controls in the late 1980s. In addition, the RBNZ had only just introduced inflation targeting in 1989. 

The NZ economy is much less regulated now, and the more flexible markets mean that prices are less sticky.

Inflation expectations have also been better anchored, reflecting the general success of inflation targeting in bringing about credibility that the RBNZ will keep inflation under control. 

However, higher commodity prices have boosted the price of food and petrol over the past year, and this has exacerbated the increase in GST. 

Over the coming years, we expect annual CPI will ease from current high levels as the GST increase moves out of the annual measure. Nonetheless, we expect rebuilding activity and the recovery in the underlying NZ economy will underpin inflation pressures in the economy, such that the annual rate of inflation will track close to 3 percent over the coming years.

Cameron Bagrie, ANZ chief economist

 A lot of attention is being focused on the headline inflation rating hitting 5.3 percent, the highest since June 1990. 

However, if you strip out the increase in GST on October 1 last year, inflation is up 3.3 percent.  Various core measures of inflation are currently running around 2.5 percent.   Core  inflation measures in 1990 sat around 5 percent. 

So while the headline picture is similar, the underlying situation is very different. 

In 1990 we were in a disinflationary environment (i.e: the trend was lower).  Crushing inflation become a key priority back then and we saw core inflation ease over the subsequent few years towards 2 percent. 

Twenty years on, we are still in a low inflation environment.  However, we expect core inflation to tick up a bit over the coming year (towards 2.5-3 percent) courtesy of an improving economy.