Surging to 6.9 percent in the year to March from a controllable 1.5 percent only 12 months prior, New Zealand’s inflationary framework is facing its greatest challenge yet as relentless upward price movement for essential commodities shakes Kiwi confidence in a return to stable inflation any time soon.

Abrupt price rises across New Zealand’s economy reflect a superabundance of drivers at home and abroad, which have come together at the same time.

Where global cost shocks from prolonged pandemic disruption have been followed by Russia’s invasion of Ukraine, conditions across our domestic economy have played a large part too.

Observers expect the last quarterly inflation reading will mark the peak for this economic cycle, which economists from Westpac Bank say would likely have occurred in June had it not been for the government’s decision to temporarily reduce fuel excise which has been estimated to take circa 0.6 percent off the Consumer Price Index (CPI).

However, even as inflation recedes from its current highs it will remain elevated, determined by several key local factors.

The Reserve Bank of New Zealand (RBNZ) must successfully walk the line between doing enough to uphold its credibility by wrangling inflation back within the one-to-three percent target band, whilst avoiding exhausting an already weary economy by sending it into a recession.

This is no easy feat, and observers say it requires a forensic examination of how we got here, how persistent inflation is and how it responds to new or altered policy.

We understand the pandemic has disrupted production around the world, at the same time international governments have printed money to save their respective economies from significant downturns. The resulting circulation of cash and household savings on travel, entertainment and the costs of everyday freedoms spurred increased demand for physical goods including residential property during extended stints of lockdown restrictions.

We’ve also seen a strong lift in prices for commodities like oil, which have flow-on-effects for the broader economy including transport and logistics for the residential construction industry.

The cost of building new has risen 18.3 percent in the last year as domestic price pressures become widespread in labour-intensive services. The growing skills shortage also means that wages must rise to attract workers as the demands for cost-of-living adjustments gain traction. This could see building consents decline from the record highs of the last year, as firms work hard to deliver the pipeline of planned projects amid widespread capacity constraints.

Observers say identifying the key drivers of inflation is important, however, risks a clear grasp on the bigger picture. The sheer strength of recent inflation is a reflection of strong domestic demand, and a key factor behind that has been highly accommodative monetary policy. In New Zealand, initiatives including the RBNZ’s Funding for Lending Programme (FLP) and its Large-Scale Asset Purchase (LSAP) programme has served to support asset values. This is evidenced by average house prices rising above 30 percent from pre-pandemic levels, and the ongoing occurrence of homeowners leveraging recent gains and continuing to transact despite current market uncertainty.

Economists, market hawkers and the RBNZ itself have emphasised the role of inflation expectations in recent statements, while both surveys and market-based measures have escalated over the last year. This points to an increasing market sentiment that inflation is becoming an embedded phenomenon, and risks a persistent inflationary cycle as business owners raise prices to offset higher costs.

For the months ahead, policymakers will be carefully watching the performance of our national housing market as the majority of household wealth tied to tangible assets like the family home means a little goes a long way when it comes to raising interest rates.

It is estimated some 60 percent of mortgage debt will come up for refinancing in the next nine months, meaning many Kiwis will be adjusting to higher mortgage lending rates two or three percentage points above when they last fixed.

Whilst far from a crash-landing housing market activity has certainly regressed from its pandemic peak, as buyers and sellers continue to adjust to new market conditions. However, just how far prices fall could have a huge bearing on what comes next for the RBNZ as it continues its fight against inflation.