A survey that carries a lot of clout with the Reserve Bank has shown a very sharp increase in the expectations for future inflation.
The results of the latest Survey of Expectations, carried out quarterly for the RBNZ, will likely increase speculation that the RBNZ might hike the Official Cash Rate by as much as 50 basis points in its November 24 review of interest rates. More details of the survey results here.
The RBNZ pays very close attention to this survey and has on occasions been very strongly influenced by the results when making its interest rate decisions. At the very least the latest results probably lock in a 25bps rise in the OCR next week to 0.75%.
Westpac senior economist Satish Ranchhod said this latest survey, along with other recent data, "indicate that medium-term inflation pressures are bubbling over".
The most closely watched part of the survey is the expectation for the level of inflation in two years' time.
Generally these figures don't move around too much between surveys.
However, in the latest survey the expectation for inflation in two years' time has shot up to 2.96% from 2.27% three months ago. That's a very large move by the standards of this survey.
The 2.96% figure is the highest since a figure of 3.00% in the same survey in June 2011. Before June 2011 one has to go back to the early 1990s in the same survey to find figures higher than that.
Short term inflation expectations - for one years' time - have risen to 3.7% in the latest survey from 3.02% three months ago.
The latest figures will undoubtedly bother the RBNZ.
Perhaps it might be most bothered by the expectations for inflation in five years' time.
This particular survey has only been running a five-years-out expectation figure since 2017.
And this time around five years ahead figure has hit the highest point ever, rising to 2.17% from 2.03% three months ago. That's a big move. And as I say, that might be the most worrying statistic in the whole survey.
The RBNZ likes to see longer term expectations of inflation 'anchored' around 2% and will be perturbed at this rise - since it may indicate that businesses will start build expectations of higher prices in future into their budgets, behaviour that is by its very nature inflationary.
This survey more than hints at the possibility we could enter into a wage and price spiral.
Remember, the RBNZ is charged with maintaining inflation between 1% and 3% and explicitly targets a 2% rate.
The survey results are the last significant piece of the economic jigsaw before the RBNZ's next interest rate decision on Wednesday, November 24.
And the survey results follow on the heels of other economic data that have continued to stun on the upside. Since the RBNZ raised the OCR to 0.5% from 0.25% on October 6 we've had annual inflation as at the end of the September quarter coming in way hotter than expected at 4.9% and unemployment figures coming in way lower than expected at 3.4%.
The RBNZ has twin targets of keeping inflation within 1%-3% and supporting maximum sustainable employment. Well, the current inflation rate is obviously well outside the range, while economists reckon maximum sustainable employment levels have very much been reached - with labour shortages very much in evidence, which will likely put upward pressure on wages.
The RBNZ Survey of Expectations is a New Zealand-wide quarterly survey of business managers and professionals. Respondents for this survey include a mixture of professional forecasters, economists and industry leaders operating in New Zealand. Nielsen conducts the survey on behalf of the Reserve Bank. Respondents are asked for their expectations of future outcomes of a range of key macroeconomic data.
This survey is conducted in February, May, August and November.
Westpac's Ranchhod said the survey results showed that businesses expect inflation will remain strong for an extended period and that it will linger above the RBNZ’s 2% target.
"That’s very much in line with our own assessment. As we’ve been highlighting for some time, New Zealand isn’t just dealing with temporary cost pressures. We’re also seeing strong domestic demand. The combination of those factors is resulting in intense – and likely long lasting – inflation pressures," he said.
"We’re already expecting a 25bp increase in the Official Cash Rate at next week’s RBNZ policy decision. Today’s result reinforces our expectations for a series of hikes in quick succession over the coming year.
"Today’s result also adds to the chances of a 50bp move at some point. Even so, we continue to expect that a 25bp hike is more likely than a 50bp increase next week due to the ongoing headwinds from the Delta outbreak."