Westpac and Kiwibank have put their annual inflation forecast expectations 20 basis points ahead of ANZ’s prediction before the Consumer Price Index (CPI) for the March quarter comes out on Wednesday, April 17.
The three banks' economists released CPI previews ahead of Statistic New Zealand reporting the figures, with Westpac and Kiwibank casting 4.2% as their expected annual inflation rate, with ANZ coming in lower at 4%.
The Reserve Bank (RBNZ), which earlier this week held the Official Cash Rate (OCR) at 5.50% for a sixth consecutive time, expects annual inflation to decrease to 3.8%, still ahead of its 1% to 3% target.
Annual CPI inflation fell from 5.6% to 4.7% in the December quarter, the lowest level of inflation the country has reached since June 2021.
ANZ economists Henry Russell and Miles Workman said they expect the CPI to rise 0.6% in the March quarter – which will bring annual inflation to 4% – and for the data to show “stronger near-term inflation pressures” than previously anticipated by the RBNZ in its February Monetary Policy Statement (MPS).
The RBNZ has forecast a 0.4% CPI increase in the March quarter, and has predicted that headline inflation will drop below 3% in the September quarter of this year.
“Broadly, the divergence across the inflation basket remains, with global (tradable) disinflation still washing through, while domestic-driven (non-tradable) inflation for now remains robust even as the domestic economy itself does not,” Russell and Workman said.
The pair expect non-tradable or domestically driven inflation to rise 1.3% from the December quarter and 5.5% year-on-year. This is above the RBNZ’s forecast of 1.1% for the quarter and 5.3% for the year.
When it comes to tradable or largely imported inflation, they anticipate a fall of 0.4% in the quarter, which would bring tradable inflation up 1.9% for the year.
In its February forecast, the RBNZ expected tradable inflation to be up 0.8% in the March quarter and 1.5% year-on-year.
“We don’t expect the first quarter CPI report to materially shift the dial on monetary policy expectations, with the details likely to have something for both the hawks and the doves. For the doves, falling core inflation will offset the near-term noise, alongside weakening domestic activity and a cooling labour market that’s still flowing through to softer domestic inflation,” Russell and Workman said.
“For the hawks, the potential reemergence of global inflation pressures highlights that a lot of the fall in CPI inflation thus far has been due to factors beyond the RBNZ’s control, as well as the risk that inflation does not return to the target band this year. The outlook remains highly uncertain, and we think the RBNZ’s strategy will be to continue to ‘watch, worry and wait’.”
Westpac senior economist Satish Ranchhod said the bank is expecting the CPI to rise by 0.8% in the March quarter – 0.2% higher than ANZ thinks it’ll be.
This 0.8% CPI uptick would see annual inflation drop back to 4.2%, falling from the December quarter’s 4.7%.
“We expect the March quarter inflation report will show that inflation has continued to ease, but not as quickly as the Reserve Bank had assumed,” Ranchhold said.
“While inflation pressures are easing, that decline is occurring gradually, with measures of core inflation lingering at levels above the RBNZ’s target range. Notably, we’re still seeing strong price increases in parts of the domestic economy.”
Ranchhod said Westpac expects non-tradable inflation to be up 1.4% over the quarter and up 5.6% over the past year, with tradable inflation down 0.1% for the quarter, bringing it to 2.2% for the year.
“Much of that is due to falls in food and fuel prices,” he said. “However, tradables inflation more generally has also taken a sizeable step down over the past year as earlier disruptions to supply chains have eased and as New Zealand households have wound back their spending in many areas (including spending on imported durable items)."
Kiwibank, like Westpac, expects the headline inflation rate to fall from 4.7% to 4.2% in the March quarter.
Kiwibank senior economist Mary Jo Vergara said the focus around CPI next week will be on the domestic or non-tradable inflation.
“That’s the RBNZ’s primary concern. It’s domestic price pressures that they can influence. And a return to the RBNZ’s 2% target midpoint hinges on a moderation in domestic inflation,” Vergara said.
“We expect an encouraging fall to 5.4% on an annual basis, down from 5.9% and further away from the 6.8% peak.”
When it comes to imported or tradable inflation, Kiwibank has priced it coming in at 2.2% next week which is also Westpac’s expectation.
“As has been the recent trend, a rapid deceleration in imported (tradable) inflation continues to carry headline inflation lower,” Vergara said.
Statistics NZ's latest Selected Price Indexes (SPI), which incorporate about 45% of the CPI and gives preview information about inflation, came out on Friday.
The SPI showed food prices had increased by just 0.7% in the 12 months to March, the smallest increase Statistics NZ has reported since April 2021.
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Russell and Workman said.
“For the hawks, the potential reemergence of global inflation pressures highlights that a lot of the fall in CPI inflation thus far has been due to factors beyond the RBNZ’s control, as well as the risk that inflation does not return to the target band this year. The outlook remains highly uncertain, and we think the RBNZ’s strategy
So now the disinflation pressure is beyond the RBNZ control according to the ANZ economists. Like rates and insurance rises are under their control? FFS.
Rates and insurance wouldn’t have a very big weighting would they? Rates is 2% of our spending so the 7% increase would do bugger all to our total spending. As for insurance yes it’s expensive but a lot of people rent and only have it for the cars (or not even for that), so that might not have a big weighting either.
You must have an above average house, our rates are 3k and our house is worth about 20% more than average. So the average (in Auckland at least) is probably around $2500. The median household income in Auckland is $130k, assuming they spend most of that it’s a fairly small percentage.
Also common in Auckland once you include the Watercare bills, which are charged separately in Auckland but AFAIK water is included in Hamilton rates. I also question Jimbos claim that his property is above average and only paying $3k rates. I checked the address I used to rent which is in the same area as Jimbo , and its CV is 1.3m, which is below average (see below), and the Council rates excluding water are $3.2k per year.
If Jimbos property was 20% above average for Auckland, it would have a ~$1.7m CV, and it rates would be currently be $4.1k per year eg. https://www.aucklandcouncil.govt.nz/property-rates-valuations/Pages/rat…
https://www.aucklandcouncil.govt.nz/property-rates-valuations/pages/cha…
The average capital value (as assessed in 2021) for a residential property in Auckland is $1.4295 million.
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Higher energy costs deflate economies. If US 5yr/5yr forward rates are a somewhat decent approximation of a real natural rate then it is not looking good for the 2020s.
We have three weeks reserve of diesel, which is essential for farms. If there was some kind of international catastrophe and we could not access imported oil (supply chain disruption etc) then after 3 weeks we would be stuffed, as we are reliant on food production from our farms for domestic consumption and exports.
Probably 1 week to 3 months depending on your delivery cycle and how regularly you’re refuelled. Most farms don’t store more than 1000 litres of diesel or petrol, they’re just refuelled more often if they’re bigger operators. It’s not much of a buffer as the cyclones showed.
Exporters can't come to the rescue. Exports are only 24% of our GDP. See link: https://data.oecd.org/trade/trade-in-goods-and-services.htm
You should check the 10Y rates for those countries positioned on the right side of the that graph!
Two examples, one from The Netherlands and one from Switzerland: You need a bit help from google translate (hypotheek = mortgage)
https://hypotheek.nl/hypotheekrente/
https://www.hypotheke.ch/vergleich-zinsen-hypothek/
Both countries are export champions with pricing power and with a very big current account surplusses. That money needs to go somewhere. Note that the Dutch rates are lower than the ECB principal interest rates.
Hard to know when / if we will see a rate cut. I thought middle / late this year after Orr seemed to change his tune, but that seems to be getting closer yet there hasn’t been anything to suggest a cut yet. If CPI comes in above RBNZ predictions then that will delay further, probably early next year. And when we do see cuts they could be small and slow.
The US Fed isnt cutting until 2025. The Australian Reserve Bank isnt cutting until 2025. NZ has higher inflation than both of them and people are expecting rate cuts in 2024?
https://www.afr.com/policy/economy/rba-won-t-cut-interest-rates-until-2…
Predicting the March quarter is always tricky as it covers the silly season.
Given past 12+ months before the silly season was absolutely dire with nil growth, falling house prices, constrained budgets, and announcements of layoffs, etc. I'd suggest spending has been - relative to previous silly seasons - pretty restrained. And, of course, far higher interest rates have steadily washed through the economy at the same time (adding to wage pressures!)
That said, there are a large number of people, particularly the older ones, who are blissfully unaware (or don't care) that others are doing it tough and this group probably didn't hold back at all.
Banks have a vested interest in keeping rates high and their margins fatter. One hopes the RBNZ has no such interest. Ergo, I lean towards the RBNZ being closer to the mark.
Edited: Anyone else noticing the significant number of retailers 'slashing prices' or offering 'massive discounts'?
I made myself a bike early last year, so have been force-fed bike advertising ever since. There has been a bike sale non-stop since Easter 2023. Rummaging through Kathmandu clearance right now will get some long lasting returns for not a lot of dollars. Recently bought a years worth of trail running gear online (shoes and a couple other things), about 65% discount all up. Looking on marketplace and trademe for some deals for some gear and a little spoiled for choice.
We’re generally fairly strict with our spending, but right now it’s difficult not to splurge and stock up.
Losing patience now. The vast majority of the energy that powers our economy comes from oil. Oil prices are going up. That means the cost of everything from transporting food, to air travel, to bitumen, plastic and a range of key chemicals goes up. There is therefore *no better* predictor of inflation than oil prices - look at this. Or maybe this from the US.
So, what happens when oil prices go up? The price of other stuff goes up, and this 'contagion' spreads through the economy. Eventually people start pushing for more pay to match price increases. This then feeds back in to price. What happens next? Yep - RBNZ decide that the smartest way to tackle this imported price shock inflation spreading through the economy is to increase the price of money. Note that business debts are around 50% of our GDP. This sends another ripple of cost / price increases across the economy.
The doom loop stops when imported oil prices fall by enough and the economy adjusts to a new price level. Kiwi economist Bill Phillips covered this in the 1958 paper that medieval monetarists hi-jacked to create the Phillips Curve. Bill noted that 'the rapid rise in import prices... initiating a wage-price spiral would continue until the rate of increase of import prices dropped significantly'.
In 2022 and 2023 we sat back and let the oil price shock wash through our economy - pushing up prices and eventually wages (which then pushed up rents). Incredibly - when you think about it - we decided that, rather than tackling the many feedback loops / contagion, we would tame inflation by (a) increasing business costs (fuel on the fire) and (b) reducing the disposable income of a few hundred thousand mortgagors to crash consumer demand. Apparently we believed that businesses would happily sell stuff at loss-making prices if we could just make them desperate enough.
So, here we are in 2024 and oil prices look like they are going to have a resurgence. Will we repeat the dumb mistakes of 2022/23? Do we think if that we just make more people more poor, and throw another 50,000 people on the dole, that will sort it?
Yup.
The absence of teaching economics in high-schools means nobody (especially voters & politicians) has learned anything since the oil shocks of the 70s. In fact, their economic understanding is probably locked in the 1920s. We're really not that bright. Or maybe too many really don't want to learn anything that challenges their worldview? I don't know. But if we don't wise up soon we'll be following Argentina in their decline from a first world economy to where they are now.
But don't worry. The government is going to reduce our reliance on imported energy. No ... Wait ...
Well, yeah... Inflation, financial asset prices, and bank profits is all that matters, screw the collateral damage.
In capitalism all that matters is capital. Central bank's are the bank's bank, not the people's bank. They take their orders from the higher ups. It's a cabal/club and we're not in it.
Maybe this is our coming reality...
"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered."
We've seen it over and over again, in history, in written works, everything suggested we shouldn't be doing is taken by the ruling class as the playbook for operating. History has repeated over and over again. One day we might learn, unfortunately for many it might be too late. That in itself will be a lesson too.
Oh. CPI has tracked changes in oil / diesel prices with a correlation of over 80% since the GFC. Click on one of the links in my comment for the data.
It isn't complicated. If major systemically imports input costs like oil, fuel, gas, wages, or credit go up very sharply over a short period, prices follow. Do the math.
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