By Roger J Kerr
I am amazed at just how many local economic commentators have suddenly decided that they see no future inflation risks for the NZ economy as actual inflation outcomes this year have turned out to be considerably lower than RBNZ and their own forecasts.
Their conviction and confidence with this new view is alarming, as it suggests that the current low 1% inflation remains static into 2015 and there are no supply and demand pressures in the future that will change price setting behaviour.
They are skating on thin ice with such views in my opinion for the following reasons:
- While a good number of USD importers are more highly hedged forward on the Kiwi dollar than previous periods of NZD depreciation, there is no guarantee they will automatically pass those benefits through to consumers with zero price increases. Some may well adjust their prices to the lower spot rate and pocket the FX gains instead.
- We have not seen lower petrol pump prices as a result of the fall in crude oil prices as the exchange rate depreciation and oil companies recouping contract floor payments to the refinery counteract the lower crude.
- Low global inflation is often cited as a reason as to why we will not have inflation increases in New Zealand. Outside some commodity prices, global inflation does not have any great impact on our domestic prices.
- The majority of our economic lead-indicators for inflation point to the annual inflation rate increasing to above 2% over the next 12months. Capacity utilisation in particular is highly correlated to inflation trends and it points considerably higher (refer chart below).
- Although back from their highs, surveyed business pricing intentions also points to rising inflation going forward (well above 2% over the next 12 months).
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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
1 Comments
This is the difference between a supply side model and a demand side model.
Really it doesnt surprise me you get so much wrong, you are wedded to the wrong model.
The big issue is, sure manufacturers want to raise prices, the problem is the consumer doesnt have nor will have the ability to pay.
To sum up the delusion,
"The real problem is that it is costing more and more to get the oil that remains out of the ground. Consumers will buy oil depending on their ability to pay, not on the price which the oil companies need to charge in order to cover the cost of producing it."
This then flows into the same problem NZ and indeed global businesses have, the buyer cannot buy the quantity expected/wanted at the rentier price.
http://www.resourceinsights.blogspot.co.nz/2014/11/is-there-really-oil-…
So really forget inflation overall. Any sector like Councils and electricity who have a monopoly will indeed raise prices, the rest will be left to compensate, that means deflation for them.
The future isnt inflationary, its deflationary held off using every increasing amounts of debt.
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