Roger J Kerr says an inflation rate over 2% looks likely next year

By Roger J Kerr

Back at the start of the year I was sounding warnings around rising food prices being a feature of New Zealand’s inflation landscape in 2017.

The incredibly wet autumn with saturated fields had prevented the normal planting of winter vegetable crops and supply shortages would force prices upwards.

Those that buy their potatoes at the supermarket will surely know about this.

The RBNZ did not seem overly concerned at the time and dismissed the likely food price increases as “temporary” and thus they did not change their 12 month inflation forecasts.

Annual food price increases to the end of September are now over 3.0% with Fruit & Vegetables up 5.7% and Grocery Items up 3.7%.

The two large monthly food price jumps of 2.8% in January and 2.4% in May have not been compensated out with any substantial price decreases since.

The chart below confirms that overall annual inflation rates do follow food prices closely.

I would not be confident that butter and potato prices are suddenly going to fall.

Therefore, an annual inflation rate above 2.00% looks more likely to me in 2018 than one that is significantly lower.

If the TWI exchange rate does move lower over coming months on a Labour/Greens/NZ First political outcome, the RBNZ may well be forced to change their future inflation projections to a higher trajectory as imported consumer goods prices and food prices are higher than previously anticipated.

Add in higher wages increase if immigration is restricted and the inflation outlook takes on a different shape.

A potential scenario that not should be dismissed lightly for those with interest rate risks………….

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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

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13 Comments

You have been wrong since 2008 on inflation, but like a stuck clock I suppose its possible you might be right one day, if briefly.

Simple as I keep saying, until we see wage packets "inflating" there is just no way we'll get inflation across the board. Until then any inflation in one sector will rob off other sectors which will see deflation. Rinse and repeat until those sectors in deflation collapse, and the real bugbear is these are probably the productive sectors.

True. Can't spare the money for discretionary spend if you have to put it all toward your housing and basic expenses.

I spoke to a friend on Friday who is now applying for jobs in Melbourne so he can move himself, his wife and his child over. Why? Cheaper rent and better salaries in his field. It's getting too tough for them to make any headway in Auckland.

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On top of that pension which is substantial. Several colleagues in IT have left for OZ where there is way more money, better job, more opportunities and a pension.

This is what BE and co dont get having cheap immigrants come in doesnt work long term IMHO it just means our best leave for OZ etc.

That's one of my biggest issues with how National have governed NZ in the past years. Seeming short-termism at its finest, rather than sound long-term planning.

Indeed - an ideologically driven catastrophe.

Those who live and die by the democratic sword require no lessons in the keenness of its blade. Of much more concern to us should be the people in our community who wield delegated authority. Those employees of central and local government whose daily decisions influence people’s lives so dramatically. The class of persons who used to be called “public servants”, but who are, increasingly, taking on the appearance of our masters.

It’s a process which has been underway for the best part of thirty years; set in motion, as you would expect, by the radical “reforms” of the Rogernomics era. The idea of public service was, of course, anathema to the devotees of the so-called “free” market. The ideas of the latter only made sense if human-beings were driven entirely by self-interest. That thousands of people willingly, and for only modest financial reward, were daily devoting themselves to the welfare of their fellow citizens, flatly contradicted the free-market ideology of the “reformers”.

That these free-marketeers seized upon the “public choice” theories of the American economist, James Buchanan, is unsurprising. A Nobel laureate, Buchanan was feted by the Right for his “insights” into the behaviour of public institutions. These he characterised as classically self-interested entities, whose actions, more often than not, turned out to be economically and politically sub-optimal. Read more

That's how National *always* govern. It just takes suckers 6-9 years to work out that this time actually isn't any different than last time.

True. Can't spare the money for discretionary spend if you have to put it all toward your housing and basic expenses.

Well that depends. It might apply to those people who perceive housing as a "cost" and I assume that most renters do. As for those periods paying off mortgages, there will have to be a substantial proportion who look at houses as "wealth creation" and among that subset, there is likely to be those who will consumer above and beyond their income constraints.

Interesting to note, I was reading that h'hold consumption contributes to 55% of Australian GDP and Martin North from Digital Finance Analytics says "regulatory attempts to curb an estimated $680 billion of interest-only mortgages had come too late."

Mr North said prospect of rising interest rates, stagnating incomes, record levels of household debt and weakening sentiment are coalescing to increase the vulnerability of lenders and borrowers to interest only. "The risk chickens are coming home to roost,"

http://www.afr.com/business/banking-and-finance/reserve-bank-to-stress-t...

Steven,

You echo my own views precisely. It's remarkable that he is given the space to continue regurgitating his tired old mantra that a tsunami of inflation is just about to overwhelm us.
Last week,I read an article in the Toronto Globe and Mail to the effect that the Fed is coming round to the view that at least some of the persistent low inflation may be structural,rather than cyclical. Who knew? Certainly not Dear old Roger,who is unaware of the influence of technology on incomes. Does anyone actually pay for his advice?

The Great New Zealand potato (chip) famine of 2017, will see starvation , migration , economic hardship and soaring iinflation , ranking alongside other great global potato disasters. Rotund financial advisors will be seen in supermarkets fighting over salt and vinegar crisps, bidding wars will break out from Ohakune and beyond as desperation breaks out.

Just saw a joke listing on TradeMe for a paccket of chips plus 10 small ziplock bags for rationing. Hope they sell it before anyone sees the report that the whole panic was down to some kind of stock ordering cock-up at Pak 'n' Save.

There won't be any CPI inflation. The hedonistic adaptions will see us move from steak to mince, chicken breast to frozen nuggets, watties to own brand beans without any loss in "constant lifestyle"

Is this a copy and paste of Rodger's from about 5 years ago?

Roger Kerr has been saying this for a decade and now is a joke. My firm used to pay for his advice; now we don't and our returns have been way better !!!