Richard Yetsenga; ANZ's Group Chief Economist on where central banks' inflation war is at

<p>Central banks' use of monetary policy to fight inflation is working, but in New Zealand we need to look at evidence demand and prices are being impacted rather than current inflation data, says ANZ Banking Group Chief Economist Richard Yetsenga.</p><p>Speaking in the <a href="https://www.interest.co.nz/of-interest-podcasts" target="_blank"><i><strong>Of Interest podcast</strong></i></a><i><strong>, </strong></i>Yetsenga says news of an inflation fall in the United States suggests the Federal Reserve is close to an extended pause having increased its Federal Funds Rate to between 5% and 5.25% from 0% to 0.25% since March 2022.</p><p>US consumer price index (CPI) inflation <a href="https://www.bls.gov/news.release/cpi.nr0.htm" target="_blank"><strong>rose 3%</strong></a> in the June year, down from 9.1% a year earlier. Yetsenga expects another 25 basis points increase from the Fed, after which he expects a period of pause.</p><p>"It's not obvious that pause will be followed by further hikes, but neither is it obvious that that pause will be followed by cuts. And I think that's a good signal," says Yetsenga.</p><p>In New Zealand, where March quarter CPI was 6.7% and June quarter CPI, due out July 19, is expected to be about 6%, Yetsenga says the current inflation rate isn't necessarily the key thing to look at in the inflation fight. On Thursday Statistics NZ said food prices rose 12.5% in the June year, a 35 year high.</p><p>"When you've hiked [interest rates] by 400 or 450 basis points, the current inflation rate, yes it's still important, but it's less additive to your information set. What is more additive is can we see the signs that demand and price pass through is being crimped by the policy moves that we have done? And the answer is unambiguously yes," Yetsenga says.</p><p>He acknowledges higher interest rates are a blunt tool and may not impact the economy the way we'd ideally like.</p><p>"Certainly there are other policy tools available. But in the absence of somebody else stepping up and delivering tho