Roger J Kerr says businesses have sent an inflation signal to the Reserve Bank with their intentions to increase prices

By Roger J Kerr

How New Zealand inflation measures track over the next six months will determine the direction of interest rates in 2018.

The RBNZ are already on the back foot with forecasting inflation in the economy with a full 1.00% increase to their March 2018 annual inflation forecast from their August projection to their revised November number.

Any reading of likely inflation trends in the economy has to take note of the ANZ Survey of Business Confidence result for the month of November released last week.

The “pricing intentions” index increased sharply from +20% to +31% with significant increases in the retail, construction and services sectors.

The survey respondents' expectations of the annual inflation rate also increased from 1.90% to 2.30%.

An argument against rising inflation above RBNZ forecasts in 2018 is the domestic economy will be weaker and that softer demand will mean that business firms cannot push through price increases even though their costs have increased.

The undisputed fact is, however, that inflation in the NZ economy is determined by the supply side, not the demand side.

On the supply side we have increased fuel prices, more permanent looking food price increases, increased prices on import goods due to the lower currency and continually increasing construction prices due to a shortage of resources.

Add on increased wage costs to business firms and the increased government fiscal spend and the increased inflation outlook from the survey respondents is fully justified.

Provided the economy does not fall in a hole and business confidence bounces back from last month’s shocker plunge, the risk has to be on the upside for inflation outcomes.

When and how the RBNZ respond to the emerging evidence of inflation tracking higher than they forecast will be the key for the timing and speed of inevitable interest rate increases.

The danger for borrowers is that the RBNZ wait too long for conclusive evidence next year that inflation is going to threaten 3.00% and they are then forced to lift interest rates more rapidly than would otherwise be the case.

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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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8 Comments

I disagree with you on the supply v demand, "intentions" and "success" are two different things. I just got a $30 a month pay increase, half of which just went on monthly rates increase alone, bet the power company eats the rest of it in what seems their annual spring price increase.

So the rest of the supply side can put up its prices as much as it wants, I have no more money to pay extra for things so something in that mix will have to drop prices to make a sale. Rinse and repeat for many ppl I suspect. So until we star to see wages rise I really cant see how anyone can increase prices unless they command a monopoly and that just eats someone elses share.

So true.

Just got back from the supermarket. 400g butter is the new norm. Peanuts are now $7 per 750g pack. 2 months ago they were 1kg.

It used to be a case of what sort off biscuit to choose. Now its Biscuits v apples v bread v butter, and only one of them can make it.

Competition is now universal. The pub is competing with the supermarket, who are competing with the council, who are competing with the movies, the petrol stations, and the schools.

It reminds me of highlander - "There can be only one".

Roger, why are you so hell bent on calling raises to interest rates? You have done this for several year now, and looking at your graph, you haven't exactly been correct in your predictions.

A lot of the governments policies are/were inflationary... however they have back flipped on most of them.

Apart from the increase in petrol tax for Auckland, we more or less have the status quo.

This is National mark II

Same old, same old

The point is however that even if the Govn raises costs/taxes if many people get no more income they will buy less of something else in order to meet the increased costs they are forced to pay.

So if I have $100 in my wallet and my rates are $60 and my food $40 and the rates go up $5 I have to spend $5 less on food.

"National mkII" indeed, the second the NZ voter made it clear Labour was un-electable if it raised taxes Jacinda just became JK in drag. I dont envy Labour, National had it sweet, they promised little and delivered less and didnt put up taxes (or offered tax cuts and got 44% of the vote). In order for Labour to get elected however Labour had to make promises to fix things but it has no extra money to do it with. So I wonder in 2020 if the long knives wont be out for Labour basically for failing to deliver (think Trump)

"same old, same old" which face it is what the voter wanted. The only party offering significant change, TOP got about 2.4% of the vote and the next party wanting to do things, would be the Greens who dropped to 6%. So over well over 50% of voters said in effect do nothing much thanks.

He has been for 8 years I think.....sooner or later I suppose he might get it right....

See today's speech by G Spencer calling for a potential LOWERING of the OCR in 2019

Bumping along the bottom.