Returning inflation to target could be made more difficult if businesses and workers try to push up their real profit margins and real wages, the Reserve Bank’s Chief Economist says.
Speaking at the KangaNews-ANZ Capital Markets Forum on Thursday afternoon, Paul Conway said inflation was “high and widespread” because strong demand had outstripped supply.
“Businesses passed on higher costs and workers sought higher pay to compensate for higher prices. Fiscal and monetary responses to the pandemic supported demand while health measures and other shocks reduced the supply of labour and products,” he said.
Monetary policy was working to lower inflation but would need to be more contractionary for longer if businesses and workers continued to chase higher prices and wages.
“We remain deeply committed in our work of bringing inflation down and keeping it low and stable in future. Quite simply, that’s our job”.
Conway said high inflation created economic costs and distortions, such as making it more difficult to see price changes and increasing the likelihood of poor decisions being made.
“People devote more time and effort to minimising inflation risks, rather than more productive endeavours. Overall, inflation leads to misallocated resources and lower living standards. Less wealthy and less financially sophisticated people are more likely to lose out.”
Spreading inflation
In 2021, inflation increased mainly because of a relatively small number of large price increases in a few specific products. But in 2022, there were small price increases across a large number of products as inflation spread throughout the economy, Conway said.
Businesses were trying to pass on higher input costs and workers were leveraging a tight labour market to negotiate higher pay and maintain their spending power.
“These second-round effects create ongoing inflation, even after the original stimulus – a relative price shock for specific products like petrol or plasterboard – has died away”.
Inflation can also spread through the economy because it is easier for firms to increase prices when other firms are. Customers may not question price increases when there is inflation in the economy.
Expectations matter
How high interest rates have to go depends on how “realistic and pragmatic New Zealanders” are in accepting they are worse off because of the pandemic, war in Ukraine, and recent storms, he said.
Quoting RBNZ Governor Adrian Orr, Conway said “the people of planet earth are poorer because of the pandemic and war”.
If businesses and workers try to push profit margins and real wages to where they would have been, then inflationary pressures will linger for longer and deepen an eventual recession.
He said it was unclear whether inflation expectations were falling fast enough to mean Official Cash Rate forecasts were sufficiently disinflationary.
US Fed meeting
Earlier Thursday, the US Federal Reserve went ahead with a 25 basis point increase to its Federal Funds Rate – now between 4.75% and 5% – despite trouble in the US and Swiss banking sectors.
While undeterred from tightening monetary policy, the US central bank said; “some additional policy firming may be appropriate” to tame inflation, which was softer than its usual line about “ongoing increases” to rates.
At the press conference, Fed Chair Jerome Powell said the committee had considered a pause due to the banking crises but decided its impact was still unknown.
“Before the recent events, we were clearly on track to continue with ongoing rate hikes. In fact, as of a couple of weeks ago it looked like we’d have to raise rates over the course of the year more than we’d expected [at the December meeting]”.
Credit conditions have tightened following the collapse of Silicon Valley Bank, he said, but whether it was equivalent to an entire rate hike wasn’t clear.
The uncertainty in the banking sector was likely to make an economic ‘soft landing’ more difficult, but not impossible.
“I do still think that there is a pathway to that. I think that pathway still exists and we are certainly trying to find it,” Powell told reporters.
92 Comments
Would love to understand what he means by "less financially sophisticated" people. When the central bank plays a key role in behavior modification, I find this condescending and lacking in accountability.
I wonder how Paul would respond to the idea of monetary debasement hitting lower socio-economic groups harder than his peers. I very much doubt he would be able to give a direct answer. He's part of the problem,not the solution.
You need to learn to read between the lines with people like Paul Conway. When he says "the people of planet earth are poorer because of the pandemic and war”, what he actually means is most people are poorer because of it, which is completely true. The small percentage of "financially sophisticated" people, however, who pre-pandemic owned almost everything already, made off like absolute bandits.
This has been the largest upwards transfer of wealth in a very long time, and we're beginning to see the consequences of it already.
If businesses and workers try to push profit margins and real wages to where they would have been, then inflationary pressures will linger for longer and deepen an eventual recession.
This chap is the Chief Economist at the RBNZ, and he is suggesting everyone should just take a real paycut, because they have abjectly failed to do their job?
everyone should just take a real paycut, because they have abjectly failed to do their job
Failed to do his job? Not many were complaining when RBNZ's ultraloose monetary policies kept our domestic economy chugging along in the absence of tens of billions from tourism and education exports.
Other than cheap debt, pray tell me how most of us in this country have managed to keep up our first-world lifestyles without the economic means to pay for it.
So its our fault that the RBNZ stuffed up with their interest rate settings!!
Nowhere in his little bleat did he accept responsibility for their part in the problem and nowhere did he mention Robbo's part either
But hey we should all just suck it up for the good of the nation
Actually he should be looking for a new job - and there is plenty of fat at the RBNZ
Indeed, the Bank’s employment priorities have been elsewhere. Whereas staff numbers in the Reserve Bank of Australia (RBA) rose a mere four percent between 2017 and 2022, the rise in the RBNZ was 80 percent. Yet, the number of the RBNZ’s “economics” staff in 2022 was less than in 2013. -Bryce Wilkinson @ NZ Initiative
Shocker.
Perhaps a few hundred years ago the head honchos of outfits like this might have been hung for the damages caused. Hell, people were hung for a lot less.
Now they just sit in their protected cocoons, earning big $$$ and talking condescending and deceitful garbage.
Oozing in self congratulation, devoid of self awareness. Conceited and dismissive. There was an old saying in so much that if you don’t know what you are talking about don’t put it in writing. It goes beyond that with this bloke who knows all about what he wants to talk about, but knows nothing at all about anything he doesn’t want to talk about and that includes for instance, the poor suckers that were actively encouraged to borrow to spend to supposedly save the economy.
Given that the total failures of the Reserve Bank made a privileged section of our country very much more wealthy at the expense of those he is telling to suck it up, this guys arrogance and lack of humility is outrageous. He needs to be fired as he only has disdain and does not have any respect for his employers, the public of NZ.
I’ve got a feeling that wealth gain is going to be “transitory” and is beginning to reverse.
Kiwis have 65% of their wealth tied up in real estate.The rest in cash, shares and businesses.
At the end of the day they could have not paid out the wage subsidies but would have ended up with hundreds of thousands on the dole…and the deepest of recessions.
We have too many cosy oligopolies fleecing us and not enough competitive price tension.
We all knew it the party was going to end one day. Hangover time!
Italians that were sick and old. Mainstream media only reporting what they wanted you to see. Why not report a bunch of school children happily playing on the jungle gym while the virus was spreading. NY was the same reporting from a hospital, showing all the people on respirators, until someone pointed out, they were all obese. And who sponsors mainstream media?
The experimental gene therapy (vaccine) never worked. Vaccinated people could still get infected and transmit this mild cold virus. The only people that died had co-morbidities and never died of the virus but with the virus. Your only concern should be the adverse reactions from the jab and the now increase in all cause deaths here in NZ, after the 'vaccine' rollout. Why are cancer, infections, and heart problems on the rise here in NZ? You should fear Pfizer, not a mild cold virus.
Err, I think the problem is slightly more global in nature? I don't remember the average person whining about how low their interest payments got? I don't expect central banks will take their foot off the brakes, until Ukraine resolves. Although this is never publicly stated. Suppressed energy demand is required as a key strategy. Putin knows this and will keep the butchery going as long as possible. The bigger picture is, we are entering the era of declining quantity and quality of energy!
Fantasy land - In a capitalist environment how on earth does PC suggest the solution is for businesses or workers to stop a cycle of external factors that are driving up their wages and prices. Which i am sure we would all love to do...
"Monetary policy was working to lower inflation but would need to be more contractionary for longer if businesses and workers continued to chase higher prices and wages. "
Example:
MrC - lets say I run a business called Business A, with a local competitor - Business B. We both have plenty of work and need as many skilled experienced workers as we can get and all available workers are gainfully employed with plenty of work by one or other company. An employee of mine then comes to me and says his mortgage went up, his food costs are up with a family - and he has been offered a job at business B for his salary plus $10k.... he wants to stay with me but needs the money.
Business A has no choice but to pay the employee more, and up their prices so they can pay the worker the extra money (there is plenty of work and the customers are still willing to pay and the owner has based his - increased - borrowing on a certain profit margin).... so prices go up. The business cant force its suppliers to cut tehir costs as they are in the same position.
How can business A say no to a rise for a skilled experienced employee... its basic business dynamics and is being caused not by the business but by the economy overheating.
let alone the governent raising pensions and benefits and wages (e.g. teachers).
So - again MrC, the issue was caused by too much money printing and too low rates for too long, and mistaking permanent inflation for temp, inflation for too long and causing huge asset bubbles and spending habits that arent sustainable - it is happening nito because of a pandemic or a war or a bank run - but in NZ mainly now due to actions by RBNZ. Businesses are now caught in a wage cycle because caused these RBNZ mistakes. The economy needs RBNZ to get tougher and faster to sort out the problem they caused ... and are not gutsy enough to solve quickly... and now have the cheek to blame business owners and poor people for them missing kpis?
when i worked for other people in sales and management - private businesses, mind - if i missed my KPI's and tried to blame anyone else i would be laughed at. Its very poor management in particular to blame others or external factors for missing your own targets that you accepted. sort it out pls.
I see that almost everybody is blaming the RBNZ - something that I have been doing very vocally for years ( I have been calling for Orr's sacking for quite some time, well before inflation started kicking in).
I agree with this sentiment - but this does not change the simple truth that inflation is cheating, it is simply pretending that we are richer than we actually are. Blaming the RBNZ now is not going to change this fact, even if we all agree that they bear a huge responsibility. The uncomfortable truth is that the only way to defeat this inflationary spiral is to keep tightening monetary conditions until we force business pricing and wage settings to get a cut in real terms, so that inflation gets down to 2% (and it remains firmly and sustainably anchored at that level). And this might well take years - whoever thinks that this is going to take only a few months is just doing an exercise in wishful thinking.
I therefore welcome and strongly commend the RBNZ renewed strong commitment (admittedly expressed very belated, and also forced on them by the results of their previous huge mistakes) to a serious approach towards the fight against inflation. The current conditions justify an OCR at around 6%, and such level should stay until inflation is really controlled.
The era of stupidly ultraloose monetary conditions is finished for the foreseeable future, as well as the delusional thinking that a loose monetary policy does not have very dangerous consequences, as we all can clearly see.
It's not like the effects of this non-acceptance are universal. Many people did very well out of the pandemic, usually at the expense of those that did badly.
And how dare people want wages to increase to keep up with increasing living costs - You are meant to be going backward in life, not forwards.
And yes when you were told you were working in a non-essential job, I bet you didn't realize that extended to your life.
I wonder what the pay is for a RB chief economist?
Businesses need to increase their profit margins because the buffers they had built up over many years have been completely destroyed by lockdowns and shutdowns due to lack of staff. I know of businesses that simply have no cash reserves left, so every time a large supplier bill comes due they are borrowing against their personal mortgage to pay it. Large businesses have blown out their payment terms to 90 days, so small businesses are really suffering. It will take years to rebuild those lost buffers, and in the meantime those businesses are but a whisker away from bankruptcy - it will just take one more knock and its over. So no wonder businesses are desperately trying to improve revenue and cashflow under the guise of inflation.
And don't blame the pandemic, blame Govt pandemic policy. Plenty of countries (like Australia) kept businesses open and people working even while implementing pandemic restrictions. I know of a cafe in Ireland that had to close but survived the lockdown because Ireland allowed takeaway food and coffee, so they operated from a food truck outside the premises. NZ had the strictest lockdowns on the planet, which is why we are so much worse off economically than Australia that kept businesses open, workers working, shops still selling fruit and vegetables, builders still building, and restaurants doing takeaways ...
I know of some in the boat you write about. I also know a lot in leisure based industries who have absolutely creamed it over the last 3 years. I put myself in that latter boat. Every Tom dick and harry were borrowing with gay abandon to buy that boat/pool/jet ski/spa/ranger etc etc... Those selling all that crap were the recipients of others short sightedness.
Remember the old ways of retained earnings, paid up capital etc.
Now so many businesses have used the house as collateral for loans
its going to be tough but many will fold
and big ones are going to face many challenges.I watched a Bnz investor webinar last week. They let slip fletchers house building unit wasn’t getting the sales.I can see many profit downgrades coming followed by some hefty write downs on land holdings and losses, and some major share price falls
we ain’t seen nothing yet
imo ...Returning inflation to target could be more difficult if they keep inflating.... oops I mean hiking rates ...lol.... Will be interesting to see what the inflation scene looks like when the govt whacks its fuel taxes back on.... stop ... I suspect prices will soar to new highs...stop...Dont be asking for a pay rise ...stop ... Will the fuel taxes get the public onto public transport....stop .... What party will have adverts on the back of the buses that never run on time....lol
This really gets me
Quoting RBNZ Governor Adrian Orr, Conway said “the people of planet earth are poorer because of the pandemic and war”.
What a load of Bullocks people are poorer because you printed so much money and doubled NZ debt its nothing to do with a pandemic or war. You can put up interest rates as much as you like Mr Orr but its not going to tame inflation hasnt yet and you have increased the OCR over 4%. The system is going to implode and the only way out is to print more money just like its been doing since August 15th 1971.
I think it’s more correct to say New Zealanders are poorer, sicker, and the media is more corrupted because of the Labour Party. In a recent preprint it’s been shown that countries mrna vaccination rates positively correlate with all cause mortality, and that’s adjusted for confounding factors. Let that bombshell sink in for a second. The more people were vaccinated the more people died. In NZ the sacred economic cows are tourism and foreign education. Labour slaughtered both cows with one stone by keeping the country locked up for over two years. I think it’s fair to say the MSM in NZ are now just a mouthpiece for the government thanks to the public interest journalism fund. Labour rode roughshod over peoples human rights to bodily autonomy causing huge divisions in society. We closed our country for over two years! Sweden kept their country open and they did better than most European countries. How much money was wasted in NZ on covid? Over 100 billion dollars. We could have weathered the covid storm with a few packets of vitamin D and some ivermectin while keeping our borders open and protecting our economy. By the end of this year Labour will have left the country much worse off than it was when they took office. It’s an uncomfortable truth.
Yes voting out labour won’t undo the damage, but it will stop them making it worse. We all play our parts. You were prominent here Pa1nter throughout the covid period in denigrating opposing viewpoints using your alternative pseudonym dcnwbz. I see all dcnwbz’s comments have been mysteriously scrubbed clean from interest.co.nz, but can still be accessed from the wayback machine - that's interesting. Anyway, I also bear responsibility for voting for labour in 2017 which is a decision I sincerely regret. As Aldous Huxley once said, "If you've behaved badly then repent, make what amends you can, and address yourself to the task of behaving better next time. On no account should you brood over your wrongdoing; rolling in the muck is not the best way of getting clean"
Gaslight all you want, the scientific data has been crystal clear for a long time now. https://c19early.org/
In a recent preprint it’s been shown that countries mrna vaccination rates positively correlate with all cause mortality, and that’s adjusted for confounding factors
So you are saying one pre-print paper proves that causation? Did you read the comments below the article?
"So you are saying one pre-print paper proves that causation?"
In this case I'd guess the vaccines are probably causal for increased mortality. What other explanation for the increase in excess deaths correlating to vaccination rates can you come up with? Come on - if it walks like a duck and quacks like a duck... Nobodys' mentioned this but it's also consistent with Pfizers' own clinical trial data where one more person died in the vaccine arm compared to the control arm. Wasn't statistically significant but it takes on a bit of a new significance now.
Did you read the comments below the article?
Yes I did.
What other explanation for the increase in excess deaths correlating to vaccination rates can you come up with?
Off the top of my head... people in countries with greater vaccination rates changed their behaviour somehow relative to those countries that didn't? How would you know if that was true or not?
During the pandemic lots of people missed checkups which has led to missing things like high blood pressure and strokes etc which kill people later?
"Wasn't statistically significant" - you said it.
people in countries with greater vaccination rates changed their behaviour somehow relative to those countries that didn't? How would you know if that was true or not?
Valid argument, but come off it! do you seriously expect people to believe that.
During the pandemic lots of people missed checkups which has led to missing things like high blood pressure and strokes etc which kill people later?
Invalid argument. Missed checkups would've been the same in high and low vaccinate rate countries.
Hahahahah.....I almost cried hysterically reading this butt-covering pearl from but one of our newly appointed virtuous overlords!
Pidgeon translation: "little people must suck it all up, it wasn't our fault AT ALL but thank golly gosh I'm here to blame Ukraine"
Can he have a little Putin piggie in the background to ultimately deflect any and all responsibility to the tsunami of S+*t that has been unleashed upon said peasantry!
Off to drink my 2 Euro beer in the Spanish sun while singing our national anthem: God Defend New Zealand.
Whoa, much negativity in the comments! It's as if we don't appreciate our central bankers explaining things in terms even we can understand.
If nobody can provide anything supportive I suppose it falls to me, despite being a less financially sophisticated person:
You are right Paul Conway, we are making a mess of things whining about the cost of living and angling for pay increases. Honestly, we are not worth saving. Please stop "helping" us. You and your mates have done quite enough.
I work in health care and have seen my income going backwards against inflation for the last decade. I guess I'm just one of those financially less sophisticated people he is talking about. Perhaps instead of working through the lockdowns etc., I should have spent some time and energy becoming more financially sophisticated, except that you need money to be able to do that!
Your problem is that you are part of the productive economy as opposed to the managerial class which you unfortunately have to work for. We have inflation due to excess demand caused by a small reduction in the productive economy that produces beneficial items for us to consume and an expansion of the managerial class including policy analysts, communications people, HR etc that get paid to produce what is not needed but who now have an excessive salary far beyond there abilities to produce anything useful, however these salaries enable them to spend and borrow like drunken sailors. And then you wonder why you have excess demand and you are falling behind. A false value proposition has been invented by these people.
Rates higher for longer. Yields thus have to rise and that only has one impact on speculative asset prices. Witness the tech companies recognizing this and gassing staff left and right. Happening here as well, witness Sky and the Warehouse to name a few in the press.
Yes, "its not our fault, its your fault"
You can tell an election is coming up and that the Reserve Bank is nothing more than a political mouthpiece for the Labour party. Trying to send a political message to not to blame the Labour Govt and its policies for anything, so just vote them back in come October. That way this guy and all his mates get to keep their cushy, over paid jobs at the Reserve Bank for another 3 years.
Labour doubled the number of people employed at the Reserve Bank in the last 6 years - none of these additional people are required to do the core Reserve Bank function of managing interest rates and supervising banks. They are doing Labour Party work - pushing "Maori Economics" (a spin off from "Maori Science"), Climate Change, "Diversity", and "Equity". Sacking everyone who was hired post 2017 would be a good start towards the "tightening the belt" that the RBNZ is recommending all us plebs do.
What they actually mean is:
"You are poorer because of our (RBNZ) pandemic policy decisions and financial response..."
And "Here are the consequences that you have to pay"
Wordsmithing doesn't hide the fact that inflation is here because of money printing which the RBNZ control...
The fact that RBNZ made rates changes without adjustment in industry policies to preserve/accelerate productions caused more harm than it would be
RBNZ shouldn't have lowered the interest rates, all they needed to do to let government to borrow in normal rates. government had lot of borrowing power in pocket back then as the debt level was much lower than other countries.
RBNZ should reverse rates cut and quantative easing much sooner when there was clear sign economy was restarting. it's about 6 months too late.
This government keeps spending money, it's non-stop, in the billions, low inflation is years off in NZ. Much of it on Maoris, the dopey gun buyback, the failed Auckland Harbour Bridge walkway, Pike River, Novopay, 3 Waters, Housing Corp blowouts, and a light rail not many will use etc. etc.. A good ol' fashioned short term bank deposit isn't such a bad bet right now.
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