Opinion: Whoa up! - check those inflation forecasts again!

The dramatic reversal in oil and many commodity prices over the last few weeks has rendered current short-term inflation forecasts redundant. RBNZ and bank economist inflation forecasts for the September and December quarters were factoring a continuation of rising oil and commodity (food) prices. The opposite has occurred and hasty revisions will be underway. The recent decreases in petrol and diesel prices should translate in the CPI increase for the September quarters being closer to +0.4% than the +1.3% featuring in RBNZ and most economists forecasts. The annual inflation rate may well stay at 4.0% for the year to 30 September as the September 2007 quarter’s +0.5% drops out and is replaced with something similar. The scaremongering about a month ago that the annual inflation rate could go over 5.0% now appears very wide of the mark. What this means for the interest rate outlook is that the RBNZ can relax even further about inflationary expectations, the risk of wage high settlements and second-round inflation impacts. This turn in events reinforces the RBNZ monetary easing signal and four or more 0.25% OCR cuts now look assured by January/February. The three to 10 year swap rates have already priced this monetary easing into their market. However it not just unexpected petrol price decreases that will make the September quarter’s inflation outcome a low number. The markets had expected that the product price discounting by retailers to get cash and slash inventory levels would have come through in the June quarter CPI figures. That did not occur to the level expected in June, so we will see the full impact of this massive discounting in this quarter. The price decreases in several categories of the CPI are significant at the moment and the only price increase of any materiality in this quarter I can ascertain will be local body rates (again!). The RBNZ does focus on the medium-term inflation picture more so than the very short-term, because that is what they may be able to influence with monetary policy settings. However, when your annual headline inflation rate starting point for those medium term forecasts turns out to be 1.0% less than the previous assumed starting point, the argument for a rapid adjustment to “neutral” monetary policy settings of 6.50% 90-day interest rates is even more compelling. ---------------- *Roger J Kerr runs Asia Pacific Risk Management. 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. �