There's no certainty the 4 key prices for the NZ economy will just trend lower, Roger J Kerr argues

By Roger J Kerr*

Last week in his Christchurch speech RBNZ Governor Graeme Wheeler highlighted four key prices that they are monitoring closely in respect the economy, inflation and thus monetary policy settings.

It is interesting to reflect on recent changes and the outlook for these prices, being the Kiwi dollar exchange rate, dairy prices, the oil price and NZ house prices:-

• The 16% depreciation of the Kiwi dollar from US88 cents to US73.60c over the last six months is about to feed directly into higher prices for imported consumer goods. These significant price increases over coming months do not reconcile with the new RBNZ forecast of annual inflation staying below 1.00% through the course of this year.

Further depreciation of the Kiwi dollar against the US dollar cannot be ruled out, however global forex markets seem to have already priced the US dollar currency stronger in anticipation of the Fed lifting US short-term interest rates later this year. In the mid US70c range (between US70c and US80c) both exporters and importers are happy enough, however that does not mean that consumer goods do not go up over coming months.

• It appears that wholemilk powder (WMP) prices have already bottomed and last week’s GDT auction proves that many WMP buyers around the world believe that to be the case. The panic selling of WMP a few months back due to European supply previously bound for Russia being dumped back onto the globally traded market is well and truly over.

• It may be a bit early to call, however it appears that crude oil prices have stabilised in the mid -US$40/barrel (West Texas) area following the plummet from US$100/barrel. Over recent days the price has recovered up to US$52/barrel. The hope that inflation will remain super low in NZ this year due to oil prices remaining at record low levels may already be dashed. Like WMP above, the panic selling of oil may have already run its course.

• Scare mongering from various sources that surging Auckland house prices will inevitably lead to a messy bursting of the bubble does not stand up to scrutiny of historical price patterns in my view.

Whilst some over-hyped suburbs may suffer 5% to 10% downward corrections when the music stops, by and large Auckland house prices generally just level off for a few years when the prices become over-extended and mortgage interest rates increase.

None of these four price trends and potential future movements provides me comfort that inflation is dead and buried in the NZ economy. Adding on higher manufacturing capacity utilisation and delayed wage pressures from a tightening labour market leads to a conclusion that complacency about inflation risks would be a risk in itself.

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* Roger is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More can be found at rogeradvice.com.