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Economists see short term inflationary pressures due to one-off costs, but expect these to recede as the year goes on and see little imminent need for interest rate rises

Economists see short term inflationary pressures due to one-off costs, but expect these to recede as the year goes on and see little imminent need for interest rate rises

Economists at the big banks see inflation figures to be released this week (Wednesday, March 21) as falling short of the Reserve Bank's forecast.

And while they see inflationary pressures building by mid-year, they expect these to recede as the year goes on, meaning that there's no imminent prospect of higher interest rates.

The RBNZ in its last Monetary Policy Statement (page 44) forecast a 1% rise in the Consumers Price Index (CPI) for the March quarter, producing an annual rate of inflation of 1.7%.

Remember the central bank officially aims for 1% to 3% annual inflation, with an implicitly targeted 2%. 

In the December 2020 quarter, the CPI rose 0.5%, giving an annual inflation rate of 1.4%.

Westpac senior economist Satish Ranchhod is expecting the official figures out this week will show March quarter consumer prices rose by 0.7%.

"That would see annual inflation slipping back to 1.3% (down from 1.4% in December).

"Our forecast is lower than the 1% quarterly increase assumed in the RBNZ’s last set of published forecasts from February. That’s mainly due to our lower forecast for tradables prices which in part reflects the flattening-off of food prices over the quarter."

Stimulatory policy settings

Ranchhod noted that last week the RBNZ signalled that it expects to maintain very stimulatory policy settings for an extended period.

"A result in line with our forecast would reinforce that view."

He says annual inflation for the year to March will be restrained by a change to the normal adjustment in tobacco excise taxes. In recent years, those taxes have risen by around 10% per annum as part of efforts to discourage tobacco consumption.

"This year’s increase will be much more modest– we’re expecting a 1.4% rise in line with the trend in overall prices over the past year. Compared to what we’ve seen in recent years, that change will shave about 0.3 percentage points off annual inflation."

He says looking at the broader trends in prices, inflation pressures are building, with core measures trending back towards 2%.

"In part, this has been underpinned by disruptions to global manufacturing and shipping in the wake of last year’s [Covid] outbreak, as well as the related increase in commodity prices. The resulting shortages have seen rises in the prices for some imported consumer goods (or at least less discounting than usual). Supply disruptions are now also spilling over into increases in costs of production in sectors like construction. We expect this will boost consumer prices over the coming months."

He sees annual inflation jumping to around 2.5% by the June quarter. Much of that is due to base effects – oil prices are substantially higher than they were in mid-2020, in the depths of the Covid shock. More recently there’s been upward pressure on import prices due to global supply chain disruptions and a spike in shipping costs.

One-off factors

"But these are likely to be one-off factors, rather than a source of sustained price increases. As the initial effects fade, we’ll be left with an economy that’s still running short of its full capacity, mostly due to the international border closure. We expect that by next year annual inflation will be back in the lower half of the RBNZ’s target range. That means the conditions for a tightening of monetary policy could be quite some time away."

ASB senior economist Mark Smith is expecting a 0.8% March quarter CPI increase, which would see annual inflation edging up to 1.5%. He too expects annual inflation to push up towards 2.5 by the June quarter and remain above 2% for most of the next year or so due to a combination of cost shocks and increasing capacity pressures in some pockets.

"The inflation outlook is still uncertain, with the RBNZ likely to defer from increasing the OCR until it is confident inflation will trend above 2% and the path of the economy and labour market are on a sound footing. 

"For now, we expect the RBNZ to remain patient and defer from raising the OCR until it is confident the expansion is secure, the economy is close to full employment and medium-term inflation drivers are pointing well above 2%. This still some way away and we have pencilled in August 2022, with risks of a later start to OCR hikes."

Smith said we have already seen cost and pricing metrics from business surveys lift, with regulatory changes (e.g. removing interest rate deductibility) likely to add to upward pressure.

"Our CPI profile is noticeably firmer than February MPS forecasts. Even with these factors, however, there are few signs of the economy overheating, with inflation still looking to be comfortably within the 1-3% inflation target range. Moreover, the further ahead you look the greater the uncertainty and the inflation outlook can move swiftly as developments change. We will be keeping tabs on key medium-term inflationary drivers – including inflation expectations, capacity metrics, and wage growth – and the wider economic and labour market outlook for signs of economic overheating. The RBNZ can rest easy, for now."

He says market reaction from the March quarter figures should be modest.

Erring on the side of caution

"Our view is that the RBNZ has erred on the side of caution by putting out a high set of Q1 inflation numbers in the February MPS, with risks tilted to the downside. Moreover, the RBNZ and other central banks have been at pains to signal they will accommodate what looks to be a temporary spike in inflation. The RBNZ in Wednesday’s Monetary Policy Review expected a “prolonged period to pass” until CPI inflation will be sustained at around 2% and employment will be at (or above) its maximum sustainable level. To us this looks to be more than a year away: we have pencilled in the next OCR hike being in August 2022 or a bit later."

ANZ economist Finn Robinson and senior economist Miles Workman expect that CPI inflation rose 0.7% in the March quarter.

"Supply chain disruptions, rising import costs, higher oil prices, and a booming housing market are all putting temporary upwards pressure on the prices consumers face. But the transitory nature of these drivers mean that the RBNZ is unlikely to be swayed from their watch, worry and wait stance," they say.

They say  there is the risk that all these supply pressures and rising costs do bleed through into broader price-setting behaviour, and become embedded in higher inflation expectations.

"This could put the RBNZ in an uncomfortable position with inflation pushing above their target band much sooner and for longer than expected, and this could see them facing a trade-off between keeping inflation contained and supporting the labour market.

"But the bottom line is that the economic damage from COVID-19 still represents a pretty significant income shock (one that’s been partially transferred to the future by loading up on debt), and that points to a still fragile underlying demand pulse over the medium term. But in the near term we see temporary supply chain disruptions, closed borders, and labour market mismatch issues keeping inflation buoyant. But, eventually when borders open and supply issues start to subside, we may be faced with an economy that’s continuing to struggle with residual capacity (ie a negative output gap). So for the RBNZ, it’ll be a pretty high hurdle for [this] week’s inflation outturn to challenge their wait and see stance."

Consumer prices index

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35 Comments

27
up

Really? A product we are importing from China has just gone up 24.6% and we know many other importers in a similar boat. Cars, food, furniture, kitchenware, petrol, timber, housing, rents etc all going up in price while wage growth remains sluggish.

Indeed.

But we can't be raising interest rates now, can we? /s

It's hard to convince a man to see inflation when his salary depends on not seeing it.

Still minimum wage going up 6%. But that's just about closing the gap. Right. https://soundcloud.com/rttv/keiser-report-the-great-inflation-deflation-...

Our Sunsetter Festival dishwasher proof cups. That's just one example. One of the alcohol importers we deal with are putting prices up between 3% and 40% depending on the item. Stock up on that Dom now buddy as its going up!

Orr has boxed himself into a corner, can’t raise ocr against US dollar. He’ll suddenly see inflation if the US sees it first.

Orr has boxed himself into a corner, can’t raise ocr against US dollar. He’ll suddenly see inflation if the US sees it first.

What's the product that has gone up 24.6% Adam?

16
up

Lies, damn lies, and CPI

Yes. The inflation propaganda is fast and furious on a inflation measure 'construct' that people accept as gospel. The data is not 'fudged' but ignores that inflation is about money supply.

the restaurant I often go just increased its price by 8.1%.

same

Just pays off the wage increases the government decided to make

18
up

Seriously, must be joking. Ask anyone and will tell, how one has to pay much more now than before.

It seems that banks and Reserve Bank first decide what narrative they want and than work backwards to arrive at that end result.

It all stinks.

Well said. As long as they can fit the data into the narrative.

anyone care to posit why central banks have selected 2% as their inflation target?

Pretty sure its along the lines of some inflation is good. Too much inflation becomes an issue...Having to change the menu at your food joint once a month to catch up with new inflated prices would become problematic...as would managing staff wages etc.

Why 2%...well Don Brash was in a hurry to get home for the xmas holidays and plucked a number out of his %#@!

"Sometimes, decisions that shape the world’s economic future are made with great pomp and gain widespread attention. Other times, they are made through a quick, unanimous vote by members of the New Zealand Parliament who were eager to get home for Christmas.

That is what happened 25 years ago this Sunday, when New Zealand became the first country to set a formal target for how much prices should rise each year — zero to 2 percent in its initial action. The practice was so successful in making the high inflation of the 1970s and ’80s a thing of the past that all of the world’s most advanced nations have emulated it in one form or another. A 2 percent inflation target is now the norm across much of the world, having become virtually an economic religion."

https://www.nytimes.com/2014/12/21/upshot/of-kiwis-and-currencies-how-a-...

If you think about it, the central banks are central planners.

Curiously that 2% rate is across pretty much all of the OECD economies...so Dons desire to go to the beach must be universal.

Consider the following.

Central banks across the OECD have an inflation target of 2% (there has been some flexibility i.e. a range such as 1-3% but the medium term target is consistently around the 2% across those economies)

CPI is widely considered a poor measure of inflation (as has been discussed here and other places on many occasions)

If interest is to be paid there needs to be growth (inflation) and that growth needs to occur within the financial system…i.e. credit (debt) so the inflation target of 2% is a credit growth target.

2% is the approximate operating margin of the private banking sector.

The inflation target is aligned with the profit margin of the banking sector.

Inflation targeting was introduced alongside the deregulation of the banking system .

its back to the old world when money was backed by gold... the supply of gold increased by around 2% per year so kept in step with the amount of gold tht existed - the target should have been abolished when the gold standard did

Would raising interest rates have any real dampening effect on rising prices due to supply chain restraints etc?

Lol... Wait u serious?

YES

Interesting - I was reading about council rates going up 30% in some places recently!

People want house prices to appreciate but don't want the costs involved owning an expensive asset.

13
up

Isn't interesting how they pick and choose what things to look though.

Perhaps we could have "looked through" the "one off" lockdowns and not wrecked the country with asset price inflation.

Well said Brock!

"The inflation outlook is still uncertain, with the RBNZ likely to defer from increasing the OCR until it is confident inflation will trend above 2% and the path of the economy and labour market are on a sound footing.
"For now, we expect the RBNZ to remain patient and defer from raising the OCR until it is confident the expansion is secure, the economy is close to full employment and medium-term inflation drivers are pointing well above 2%. This still some way away and we have pencilled in August 2022, with risks of a later start to OCR hikes."

The similar Japanese template of "stimulus" offers no respite from low rates in NZ. Same in US - CPI Services less Rent of Shelter.

They way they have decided to get out of a quagmire of their own making is to continue to punch savers in the face. How are you going to aggregate the capital formations necessary to develop industries and .... hellooo productivity? Borrowing at low rates does not do this when it all goes into underproductive asset classes. But the RB knows best I'm sure.

Economists and bankers about as keen on forecasting inflation as they are at forecasting drop in anything like gdp for example. Always better coming. Pathetic

It is INCREDIBLE how untrue it is! Look at the prices in the shops! Try to buy the car! Actually my friend traded in 1 year old cad for $10000 more (20% than he paid!), look at the trade me listings and dealers sweeping private car sales. And of course the property inflation is insane.

I ask - please give us details how this was calculated but it is NOT TRUE!

Your friend bought a new car, then unsold it a year later for $10'000 (20%) more… really ?

It's fairly clear over the last few decades that reducing the OCR offers a very temporary boost to CPI over the short term but results in CPI being lower thereafter as people use the opportunity to leverage up on debt and their disposable incomes decline. It's clearly a 'spiral of debt' with Reserve Bank policy having a diminished impact.

However the Reserve Banks seems to be lead by people who absolutely expect the same actions repeated to lead to a different outcome.

Agreed. I seriously doubt whether adjustments to the OCR achieve any real impact nowadays. The economy is a complex system, with lots of inertia and complex inter-dependencies (e.g. your debt spiral, interest paid on Govt securities, forward pricing channel etc). The idea that you can 'speed up' the economy by reducing OCR and slow it down by increasing the OCR is a theory for simpletons (kids with pretend steering wheels in the back of the car). I suspect that the RBNZ will have more impact through signalling intent, and by using open market operations to influence long-term interest rates (as it has always done - albeit never at the LSAP scale).

Seems I have to take up smoking, if I want the inflation I'm actually experiencing to resemble what I'm told I'm experiencing?