Report shows accelerated inflation rise

Friday May 13, 2016 Written by Published in Local

The inflation rate in the Cook Islands accelerated to three per cent in the financial year 2015, says the Asian Development Bank (ADB).

 

In its Economic Outlook 2016 report the report says the increase was a result of higher alcohol and tobacco taxes and a weaker New Zealand dollar.

Local economist Vaine Wichman says the Cook Islands’ inflation rate usually hovers around or above that of New Zealand as a result of this country’s import ties with New Zealand.

She predicts there will be a decline in inflation this year as a result of the oil price slump, and as productivity in exports takes hold.

The ADB report projects inflation will fall to 1.8 per cent in financial year 2016, and two per cent in financial year 2017, as import prices rise.

Ministry of Finance and Economic Management economic advisor, James Webb says use of the New Zealand dollar means the Cook Islands has benefitted from relatively low inflation.

Compared to Cook Islands’ inflation levels are less volatile than some neighbouring Polynesian countries, he says.

“For example, over the last five years, the Cook Islands has experienced average annual inflation of 2.1 per cent, compared to an average annual inflation rate of 1.8 per cent for New Zealand, 1.9 per cent for Samoa, and 2.5 per cent for Tonga.

“Our inflation rates are much less volatile than both of our Polynesian island cousins, with our inflation rate floating between 0.6 and 3.0 per cent, as compared to -1.2 and 6.2 per cent in Samoa, and 0.1 and 6.0 per cent in Tonga.”

Stable inflation rates, Webb says, are vital, as current inflation sets price expectations for local businesses.

The bigger the variations in inflation rates, the more risk businesses take when they set their prices, as they will either be too high or too low compared to their competition, Webb says.

“This is why the reserve banks of New Zealand and Australia often talk about an ‘inflation target’, and will stimulate inflation if their inflation levels drop too low.

“While we don’t have a central bank, our relatively stable inflation rate of around two per cent a year is actually very consistent with the inflation targets of the RBA (Reserve Bank Australia) and RBNZ (Reserve Bank New Zealand).”

Webb agrees the major sources of inflation in the Cook Islands are increases to tax rates on tobacco and alcohol from 2012/13 through to 2014/15.  

However, he says this is part of a concerted effort to encourage more responsible consumption of these products.

“The Ministry of Health just finished conducting the STEPS health survey in conjunction with the World Health Organisation, but early figures suggest that these measures have been largely successful in reducing tobacco consumption in new and existing users.

“However, for people who give up smoking, or for those who don’t smoke, average annual inflation has been closer to 1.5 per cent, the lowest in the Polynesian countries.”

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