A Bernanke-Blanchard model decomposition of New Zealand inflation: The pandemic and beyond

• This Note assesses inflation in New Zealand through the lens of the Bernanke-Blanchard (2023) model. The framework decomposes price and wage inflation to the individual contributions of supply shortages, labour market pressures, food and energy prices and productivity. • The historical decomposition of headline inflation over the past four years suggests that supply shortages and labour market tightness have contributed significantly to inflation. The contributions of more direct factors such as the prices of food and energy have been lower and less persistent. • In the absence of pandemic-related shocks, and supply disruptions due to war and weather events, annual headline inflation in New Zealand would have remained just below 2%, the mid-point of the RBNZ’s target band, by early 2024. • The sizable contributions of labour market tightness to inflation distinguishes the New Zealand economy from its peers in the advanced world. In most other countries, supply shortages and food and energy prices have contributed more materially to inflation.