Roger J Kerr says with price pressures building in the domestic economy, non-tradable inflation will not continue to decline as it has done over recent times and the RBNZ may have to bring forward the timing for interest rate rises

By Roger J Kerr

Last week's Quarterly Survey of Business Opinion from NZIER was a timely reminder to the RBNZ and interest rate markets that NZ inflation has the capability to surprise on the upside this year.

Capacity utilisation in the economy is running at very high levels and more companies are intending to increase their prices over the coming period.

Add in severe skilled labour shortages across most industries in New Zealand and you need to wonder just how long wage increases can remain so subdued.

Of course the strong immigration flows are for the meantime adding to the labour supply and thus local companies are not (yet) having to pay over the odds to attract and retain skilled workers.

At some point this delicate balance of demand and supply will shift and when that happens the RBNZ will need to factor in some wage-push inflation to their inflation forecasting models.

As commented by others, it may appear that our CPI inflation trends are dominated by fuel and food prices and other prices do not count.

However, judging by these recent business survey results that situation may be changing.

Construction costs continue to increase and as our largest building company has found out over the last 12 months, it does not necessarily pay to go for the cheap and cheerful materials solution.

With price pressures building in the domestic economy, non-tradable inflation will not continue to decline as it has done over recent times.

Add in the jump up in food prices over the last quarter, the CPI inflation release on 20 April may surprise and send a reminder to all and sundry that inflation is by no means dead in New Zealand.

The RBNZ’s current stance on when monetary policy will need to be adjusted with OCR increases is sometime in 2019. Whilst that is their current message to the markets so the NZ dollar does not appreciate for the wrong reasons, that signal can always change at some point of time in the future.

The interest rate markets and economic forecasters are picking that the OCR will start to move up in mid-2018. As GDP growth continues at a robust pace this year, both the markets and RBNZ could well be forced to bring forward their timing.

Roger J Kerr contracts to PwC in the treasury advisory area. 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