With skyrocketing food and energy prices, inflation in New Zealand remains a problem. The Consumer Price Index, a measurement of change in the cost of living that includes prices for electricity, food, housing, and petrol, rose 0.7% in 1Q2008 and 1.2% in 4Q2007, giving a current measurement of 3.4% year over year, meaning that the cost of living in New Zealand is now 3.4% more expensive than it was this time last year. The pressure on energy prices in particular is so severe that the government has delayed implementing the liquid fuels section of the Emissions Trading Scheme and intend to refuse any higher taxation on fuels until 2011.

The Reserve Bank of New Zealand has kept interest rates at 8.25% since September 2007, attempting to halt this steady climb; however, wage data released this past week indicate second-round inflationary effects have taken solid hold of the workforce. The Labour Cost Index for the private sector rose 0.7% during 1Q2008, following a 1.1% rise in 4Q2007, nearly parallelling the rising cost of living. This means that the workforce, and their employers, expect this inflationary uptrend to continue, and are negotiating higher wages to compensate. When such expectations penetrate the labour market, it becomes harder for the RBNZ to control overall inflation and force it back down into their preferred range of 1–3%.

This higher cost to the employer per worker, the so-called wage cost, takes a bite out of the efficiency of the workplace. It becomes more expensive for the employer to maintain its entire workforce, which often leads to layoffs. Recent data from the Household Labour Force Survey, available through Statistics New Zealand, indicated that this small country with its small workforce lost 29,000 jobs in 1Q2008, a 1.3% loss, with a reduction of 1.9% in the average number of hours worked.

At the same time, the housing market in New Zealand is tanking. The Real Estate Institute of New Zealand recently released sales figures for the nation, and on average, 45.5% fewer homes were sold in April 2008 as compared to April 2007. Home price growth is also slipping into negative territory, with the national median price falling 1.4% over the same time last year, a collapse predicted ten years ago by Charles Drace, CFP. (How to Survive the New Zealand Residential Property Crash, The Raven Press, Christchurch, New Zealand, 1998)

Retail sales and other growth indicators are also turning sour in New Zealand, giving rise to the real possibility of sharply negative GDP figures for the remainder of this year. All of these factors in the medium term will force the RBNZ to begin cutting interest rates to encourage growth, perhaps as soon as the September 2008 meeting.

This dismal outlook increases the chances of the New Zealand dollar falling in value against many of the more actively traded currencies on the forex market. The release of the unemployment data alone saw NZD fall 100 pips in less than twelve hours against USD, not currently the strongest currency on the forex trading market, and boosted the Australian dollar 175 pips in one day.

Savvy forex traders will be watching the release of future New Zealand data in anticipation of further short selling opportunities.