In mid-2022, New Zealand’s annual CPI inflation rate accelerated to 7.3%, reaching its highest level in over three decades. This rapid escalation caught policy analysts by surprise, significantly exceeding the Reserve Bank of New Zealand's (RBNZ) target band of 1% to 3%.
A primary driver of this surging inflation was the escalating cost of housing construction; prices for building materials, such as structural timber and steel, rose by over 20% year-on-year due to global shipping bottlenecks and import constraints. Furthermore, severe domestic labor shortages—evidenced by the unemployment rate falling to a historic low of 3.2%—forced businesses to aggressively raise nominal wages by an average of 7% to retain staff, substantially increasing firms' operating costs. Concurrently, the complete reopening of international borders triggered a massive influx of international tourists and returning students, causing demand for domestic accommodation and hospitality services to surge far faster than the capacity of local businesses to expand services.
In response to these compounding pressures, the RBNZ Governing Committee embarked on an aggressive monetary tightening cycle, raising the Official Cash Rate (OCR) from 0.25% to 3.0% by August 2022 to cool the overheating economy.
With reference to Extract C, explain two reasons for the increase in the rate of inflation in New Zealand.
