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The inflation 'beast' of the 1970s and 80s WAS slain and any inflation we see ahead of us is 'only a distant cousin', Kiwibank economists say

The inflation 'beast' of the 1970s and 80s WAS slain and any inflation we see ahead of us is 'only a distant cousin', Kiwibank economists say

The inflation 'beast' of the 1970s and 80s WAS slain and any inflation ahead of us is "only a distant cousin", Kiwibank economists say.

In their First View publication, the Kiwibank economists say most of what they've seen in the latest inflation figures, can be considered temporary.

"And the tectonic structural forces, deflationary forces, are intensifying."

Yes, inflation has risen significantly, they say and wages are finally rising. But remember, this follows one of the greatest economic disruptions of a generation. Demand came back stronger, and supply couldn't keep up. Everything that has been seen can be labelled "transitory", the economists say.

"We're more interested in where inflation lands this time next year.

"The big factor that's encouraging, is the mammoth amount of fiscal spending done globally, especially in infrastructure.

"Inflation has been particularly low over the last decade, in part by the fiscal austerity of Governments (esp. in Europe).

"And in the post-GFC decade, we've seen inflation rates well below central bank mandates. Central banks have failed on the downside since 2008. In fact, inflation has been steadily declining since the 1980s, when the RBNZ was the first to start targeting it."

The economists say the structural decline in potential growth rates and inflation have been driven by ageing demographics. "And these tectonic demographic forces only intensify from here."

They say technology will continue to lower inflation.

"Remember, inflation is a measure of value per dollar. A bottle of beer with less alcohol, but the same price, is inflationary. A TV today, with more technology, at the same price as the earlier version last year, is deflationary. A TV cost less today than it did 10 years ago, and includes 'Smart' technology.

"Technology will continue to streamline, automate, and disrupt. A mobile phone is now a little more than just a phone. We don't need a clunky camera, a hard cover diary, or a wallet anymore."


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The inflation "beast" that once ruled the 1970s and 80s was slain, the economists say.

"Any inflation beast we see ahead of us, is only a distant cousin of the massive beasts seen in the 1970s and 80s.

"Think of the Game of thrones dragons that shrunk the longer they were in captivity, ending up small and defenceless.

"Our inflation has been captive for decades. And the structural forces are to the downside with ageing populations, huge technological advancements and low medium term market expectations."

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79 Comments

"Technology will continue to streamline, automate, and disrupt. A mobile phone is now a little more than just a phone. We don't need a clunky camera, a hard cover diary, or a wallet anymore."

Awesome, I can take in focus pictures of the moon without needing my own observatory. Just a shame about the price of food, transport and shelter.

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Inflation scare is being manufactured to allow Banks to make more profits. With massive pump priming happening
and likely to continue in the US and with the Pandemic not going away, the economic scene points to possible recesssion or deflation only. Not boom and consistent inflation. Banks are likely to have access to cheaper funds from overseas. Scaring borrowers to fix at higher rates works to their advantage. No way, they are going to be able to continue doing that. Businesses here cannot afford more interest costs, on top of lack of growth in revenue. I think Adrian Orr will surprise the Banks this time around and keep the OCR in place. Remember Christmas is not far off.

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Banks are attempting to drive RBNZ their way, but RBNZ has the Highway. It can enforce some sense of order.

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Economists don't measure anything. Why, then, are we quoting them?

David - download and read:
https://un-denial.com/2021/07/17/reality-blind-by-nate-hagens-and-dj-wh…

Then overlay.....

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A typical example of wishful thinking, I am afraid.
I would love to see this Kiwibank economist being proven right, but he neglected to mention the reckless amount of money printing and the suicidal ultra-loose monetary conditions that have been enforced in recent times. The author seems to think that this reckless debasing of the currency and this promotion of mountains of debt will have negligible effect on inflation - quite a bold assumption indeed. So bold that it might be suspected to be inspired by self-interested preservation of the current housing Ponzi, which has been a great generator of profits for the banking system, rather than by economic fundamentals.

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Most of the 'money printing' you mention gets trapped inside the banking system.
QE in the long term is deflationary, look at Japan, we are following in their footsteps.
I agree with the whole article. Deflation is the one to watch out for.

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As someone with no debt, why should deflation be something I should particularly watch out for? If it were to happen.
Genuine question.

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Well if central banks and governments didnt do anything to stop it im sure it would put your savings at risk real quick. Also not saying its a bad thing just saying that in the context of the transitory agrument i think eventual deflation will be the more probable outcome rather than inflation for many years to come.

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QE in the long term is deflationary, look at Japan, we are following in their footsteps.

Japan is deflationary because h'holds and firms have been paying down debt and saving. This is behavioral, not about QE. NZ and the Anglosphere are still spending like drunken sailors. That's why QE has been "working" and partly why you have asset bubbles primarily in the Anglosphere countries.

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Yes but you know why they dont spend and they save on average? Because they have some of the worst demographics in the developed world. They sell more adult diapers than they do child diapers.... All the oldies are sucking money from the economy. Also paying down debt in todays world is deflationary it destroys money in the system.

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Everyone loves to point to Japan to prove there's no risk in all this money printing. The problem is that Japan was doing it during the height of the global deflationary period, and they were the only country printing. The pressure of global deflationary cycle simply swamped the BOJ's efforts. We're in a different world now. Every major developed economy has had it's central bank print money at exactly the same time. You can't look back to any time in history to compare to what happened now. These are very uncharted waters, and anyone who tells you they know the outcome is full of sh*t.

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Everyone loves to point to Japan to prove there's no risk in all this money printing.

Well said Useful. As I mentioned, the Japanese are living within their means and paying down their debt. Then, they are also still a net creditor nation with a huge industrial output. The idea that "Japan hasn't gone down the toilet so no probs with all the QE" is suspect. I don't believe NZ is capable of doing what Japan has done with QE.

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fortunr,

It doesn't seem that bold an assertion to me. We have had massive amounts of QE in the US, Europe and Japan without inflation so what's changed? As we all now know, the forecasts of economists are to be taken with a large grain of salt, but here i think they are broadly correct. The structural forces acting to depress inflation remain intact, while the forces acting to pump it up are cyclical.
We know that global GDP has been declining for almost 60 years-I have a World Bank graph in front of me-and in part, i believe that represents a declining EROI as well as the better understood effects of globalisation.

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Phew - A little sanity at last.

It has been high misunderstood for far too long in this Fed-centric era (cult) which identifies foreign selling of Treasuries with everything it is not. In other words, there has been a long and consistent history which conclusively shows foreign selling of not just Treasuries but also T-bills and other US$ assets, both by private foreign institutions as well as overseas central banks and governments, is brought up and forced upon for entirely some form of dollar problem or shortage.

Not because they hate the US, or fear its government’s reckless profligate ways. Moreover, it has nothing to do with inflation except for the correlation between Treasury or US$ asset selling (at least diminished buying) and the deflationary reserve currency (eurodollar) condition driving it. Links here, here and here.

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Dont get me wrong I agree with almost everything this guys writes.

But it is always at the global level, and that doesnt mean that inflation cant be felt in isolation.

Clearly there are a lot of forces for inflation that we see right in front of us such as hiking up minimum wages, water rates going up 7%, power pricing, fuel prices, building supplies and tradesmen hourly rates.

Just because 1 thing is true through one window, doesnt mean another thing cant be true from another lens.

The truth is that there are a lot of challenges ahead for economies but also inflation is making its presence felt at the ground level, some transitory and some more permanent.

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The NZ government 10 year note is struggling to reflect general inflation while priced at 1.49% yield.

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I reckon the Fed will be moving interest up slightly next year to ensure it can sell some bonds to anyone other than the US government but stagflation will be in situ for some time. We will naturally move up in concert with the Fed (as we are a vassal state) and this will slow house price increases but basically do nothing else. The prices of the things we are buying from China will stay high for some time as they are playing us for price now, and fair play we have walked into that with eyes wide open. Once they have bought the assets they are interested in they will let supply increase again so as to keep us on the hook.

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I don't know man. "Supply-chain disruptions, key labor shortages and resurgent demand driven by multiple rounds of fiscal stimulus will persist through the end of the year, if not longer." Better to prepare worst than being too optimistic.
https://www.wsj.com/articles/supply-crunch-risks-extending-into-2022-st…
We'd be lucky if global economic activities are back to normal in 2023. Even the activities are back to normal, the inflation wont be normalized for quite a period of time. So we will probably be looking at 4-5 years for inflation to be normalized.

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Lets start measuring inflation honestly and accurately reflect what affects a large proportion of our people. The purchase price of houses.
It seems to me that the money people were quite happy with the deeply flawed CPI/OCR RB management model when inflation was low, but now that inflation is rising they are looking for every reason to ignore it. You have to ask "who was the RB management model designed to serve?"

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Yeah I am of the same opinion, but the component parts (apart from the purchase price of housing which should be included and is not) are pretty sound.

What really stops any meaningful use of the CPI as it relates to our real-world experience is the hedonic adaption factor they apply to recognise the product we buy today is better than that same product yesterday. It's a fudge and weighted (in my opinion) much more heavily than it should be.

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Yes, this is something that few people understand. If a superior item - for example a phone with superior camera technology - sells at the same price as the old phone then the CPI will decline. The extent of the decline then becomes a subjective estimate by the CPI statisticians. This then balances out increases in more basic items related to food and shelter.
KeithW

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It's irksome. The CPI doesn't reflect the rate of inflation on essentials, because the improvements in less essential items mask it. So it becomes harder and harder to feed, clothe and house yourself, but CPI says 'everything's fine, your phone has a better camera'. It's a bit like how, when younger people complain about housing costs and how easy it is to become homeless, older folk will say 'well, we never had smartphones in my day, you don't know how lucky you are..."

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Well its true, came to NZ in 1974 and was lucky to get a old black and white TV, huge box in the corner of the room that took time to warm up and come on. Now well I have 3 flat screens in the house, how things have changed. Mobile phones never existed, not even the VHS player, no dishwasher, no multiple wall ovens. Great times however, wouldn't swap them for being a kid now, in fact I feel sorry for them now.

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I’m on an average income and completely locked out of the housing market because I can’t leverage off parents. I’ve had to move 5 times in 8 years because property owners love to buy/sell/Reno and there’s no guarantee of tenure for renters. I’m 36, married, and still living in a group flat because it’s the only way to live on a median income and have enough left over after rent to have any savings. I work in a supposedly high-demand field, yet here I am. I don’t even use Netflix, etc… I would happily forsake my smartphone and go back to an old Nokia in exchange for affordable, stable housing. It’s notable that no one’s actually offering me that exchange.

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In rural NZ where there is only GSM coverage (ie. no 3G / 4G / 5G) houses are actually still quite affordable. I suspect that you just aren’t really keen on the exchange. You will likely indicate that you want to live in an area with population density many times as high as the ones in which housing was affordable “back in the day”, with an excluding traffic commute to the local township that is much lower than “back in the day”.

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Often the product may improve but you aren't able to buy the lesser product for less money as it's no longer available. So your left having to pay the same price but cpi is negative.

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One of the many deep flaws in the CPI/OCR model is that as you point out, normal human advancement will produce better products for a lower price. This should naturally lower the CPI so that more people can benefit from more and better products, or have to work less to get what they need.
The RB model is set up to never allow this to happen. If prices lower then it must lower interest rates and force up inflation. As we have seen, this has only ever resulted in asset bubbles which transfer wealth to the already wealthy away from the people who are asset poor. It has also had the effect of undermining the discipline of a free and competitive market, again denying the general population from the benefits of competition and instead rewards the monopolies, cartels and the inefficient. Remember the RB model is set to encourage price rises under these conditions to raise the CPI.
Has any body noticed any like the above going on?
I have been banging on about this for years but nobody seems to get it.

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I run an automotive business. We can’t find staff and the ones we can hire want significantly more than what we pay our current team members. Demand is outstripping supply and as a result we are seeing prices of some new and used cars more than 20% dearer than what the equivalent was last year. Every brand has a long waiting list - Toyota NZ are now advising a lot of vehicles won’t arrive until mid 2022. It will also get much more expensive with the “Ute tax” coming in - the average vehicle cost will increase as a result of this tax alone and used vehicles currently on our roads will be worth more as the equivalent fresh import will now be thousands of dollars more expensive. With cars being one of the most expensive CPI items it will be a sector to watch. I for one can’t see this rapid escalation of prices ending in the short term.

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The "ute tax" should, in theory, be price-neutral across the entire fleet. Of course that depends on how people respond to it.

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The Ute Tax will not be cost neutral in real world terms. The supply of used EV's in Japan suitable for export to NZ has become more expensive buy a very similar number to the feebate amount. All new Ute owners will be doing is subsidising Japanese used car dealers via higher auction prices. I am in the trade and have seen the change already.

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Basic demand/supply curves say that's true

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there will undoubtably be deflation....meanwhile those that do the work need to live and so there will be inflation in the interim.

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Of course its Transitory - and here's why
Councils are all rushing to reduce rates, water rates and various other consenting charges
Utility companies are once again reducing the price of power, gas and water
Building supplies are about to do a huge U turn and not only remove all their recent rises but cut further
Rents are going down - landlords are desperate to pass on interest rate savings and absorb compliance costs
Companies charging more for goods will be sure to reduce these prices once all these reductions take place

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Also, how circular are these prices increases? Does a company that increases its prices indirectly increase the cost of goods or services they use?

I guess wage earning consumers is where the bulk of the price increase burden will lay, however there seems to be a shortage of wage earners at the moment so they'll likely put up their prices too.

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Ok I love the sarcasm. But there's a serious point that you've missed: transitory inflation does not mean that the prices decrease later. It just means that the rate of increase slows.

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yes and i get that - but a) its not going to slow or disappear anytime in the next few years - so if you use transitory as an archeologist and not as a family on the street might .... then maybe and B) the problem with say adding another transitory 300K to Auckland house prices this year -- is that if house prices slow down and even stop -- you have still added 60K to the deposit needed for a nurse currently earning 60-70K a year before expenses and even a 5% pay rise call it $3500 before tax - will mean 20 YEARS extra saving to catch up with this transitory price increase!

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What planet are you living on ? Prices are going ballistic. What do you call "Transitionary" ? 5 years ? Many things will just get locked into the new prices, container shipping is still increasing so that affects all imports. How are the councils reducing rates, they are all increasing rates and have been for years, the new 1st July 2021 RV's will just be an excuse to bump up rates significantly from 1st July 2022. Its mental out there every time I go into Wendy's to get a burger meal the price is going up and up, its now over $18 and I'm expecting $20 before Christmas and thats just for lunch for 1 person.

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You might need to RMA your sarcasm detector mate, it's clearly broken

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too much eating at Wendys dulls the brain!

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The comment is clearly tongue in cheek.

I had a wee chuckle at the level of absurdity, suprising that you missed it.

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DP

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kputs,

Fascinating." Councils are all rushing to reduce rates, water rates and various other consenting charges". Could you produce some evidence to back that up?

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sorry must have read it on Fox news :)

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Dis be CB newspeak?

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I agree, deflation is the much bigger threat. Central banks have been trying to find inflation for over a decade now and failed. The inflation we're seeing right now is significant, but temporary.

Deflation is the bigger threat because if it does take hold, it won't matter how low interest rates are. The true cost of debt is the rate of interest minus the rate of inflation, and if the rate of inflation is negative, all that debt is going to get increasingly expensive to hold.

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Theres inflation and then there's inflation
Central banks have been looking for credit growth for (considerably) over a decade...and have done everything they can to avoid wage inflation. Unfortunately when you are at zero bound the option of ever reducing interest rates ceases.

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Well inflation certainly affecting BTC this morning, I suppose it has to quickly adjust to the constant debasement of FIAT worldwide?

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haha, I knew the crypto preachers would be out this week

quiet as a mouse when it was $28K

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Ditto crypto bears..shocked I take it?

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Any idea what Bitcoin was 'quickly adjusting' for in May?

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China trying to ban it (most of the mining has now moved to USA)...next question?

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Lol :)

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1991 A decent fresh used Japanese import car 10k. 2021 A decent fresh used Japanese import car 10K
1991 A 3 brm brand new house & land package in South Auckland 100k. 2021 The exact same house used 750K
1991 BNZ looses 71 M. Sold off to NAB. 2020 FY BNZ (division of NAB) makes 762 M.
1991 Median FT annual pay 30K 2021 Median FT annual pay 53K

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A vey nice example! I presume the numbers are real?
KeithW

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Cars. Personal observations of a middle aged man. The South Auckland house the same. But I used to drive past the development near where I lived daily back in early 90's. With the hording offering 99k house and land deal. Was a Fletcher development. Mortgages guaranteed by Housing corp. When the recession hit. Many of the buyers got hit. Fletcher's repossessed the homes. Collected the government guarantee and the sold back on the market. Some of those poor people are probably still renting today. If they just could have held on for a couple of years they would have been all good. The other stuff courtesy of uncle Google.

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Lines up pretty well from what I can see. The wages are pretty much bang on as well but its worse than that really, was on 32K back then just coming out of a 3 year apprenticeship but all those years later it had barely doubled with decades of experience.....house prices on the other hand have gone up double figures.

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Population density around that house and as such demand for it was lower in 1991 than in 2021. You need to compare the 1991 house with one in an area that has the same density today that the old house had around it in 1991.

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A 100k house in South Auckland was a hard sell in 1991. Hence the need for a government mortgage guarantee to shift them.The Employment Contracts act was just around the corner. Working Class peoples incomes and conditions were unilaterally cut. Incomes were flat to falling for the next five years. But they magicked up the accommodation supplement in 1993 so the financially well endowed could buy up those properties as rental investments and have the government subsidise the rents for the next 30 years. That coupled with the first waves of Asian immigration in the early/mid 90's saw the value of that house probably double to 200k by 96/97.

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Came here in the early 80s. Tried to buy a washing machine, but only two makes were available, both assembled here, Sanyo and Champion I seem to remember, and both cost over a grand. No shop would negotiate - the price was fixed. A pretty basic TV made here was around a grand, too.I had wondered when we landed at Singapore on the way here why all the Kiwis were carrying armloads of electrical goods. Mind you, our nice house on a quarter acre in Napier cost 60k! Probably 800k today, while the washing machine and TV would still be around a grand. That’s what exporting jobs to Asia and then letting the beneficiaries of that policy use their new found wealth to drive up our house prices. Nicely circular.

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Your comment highlights another point re all the "deflation" we've seen in recent years. While your washing machine back in 1980 might have cost a grand, it would probably still be going if you still had it. Go buy one now and see how long it lasts? You'll be shopping for another one in 5-7 years. That's not factored into these "deflationary" forces we keep hearing about is it? That TV they keep telling you gets better and cheaper, lasts about 5 years before the backlights or something else fails.

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I've actually got a Champion oven which was installed probably around the late 70s, still working good even today.

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White and Electronic goods here in NZ are still way more costlier than in the rest of the world.

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All hail the economic seers!!!!!!

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Can't take it much longer, they really think that we completely stupid.

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they really think that we completely stupid.

Yes they do think we're stupid. The ability to buy a high-powered Oppo device at better value today than y'day has nothing to do with the NZ inflation experience.

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Lol indeed! There is no inflation because... technology...the CPI is now a scam

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I like the TV example but how much can people be spending on electronics goods now? It must be a single digit percentage of median income.

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You’d be surprised at the number of people willing to spend 5% of their annual take home pay on a mobile phone followed by another 1% for a data plan. Even if they only do this every second year instead of annually that still equates to 3% of their annual income on 1 electronic item. Assuming a median after tax pay of 50k.

Add in Spotify & Netflix subscriptions totalling another 1% and a computer that costs 4% and is replaced every couple of years (so 2% annually) and you get to 6% of after tax pay spent on electronics annually if you have no white ware. Once you factor in that some people also enjoy having a TV or portable music device, you would quite easily get to 10% . The CPI appears to weight all electronics bundled together at about 1%

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And the experts were telling us last year that house prices would drop 20%.

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Experts haha
Experts don't get things so wrong so consistently.

They should either refrain from forecasts (like Eaqub) or frame them with caveats and plausible alternate scenarios.

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I wish they would tell the whangarei council that inflation is transitory,got my rates bill today.increase 7% this year and planned 4.5% in years to come.

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Is just going to raise rents even further

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Whatever bank economists say the absolute opposite tends to happen.

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My favourite quote about the Economist : One who sees what is working in practice and goes on to find out whether it will work in theory also.

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The global inflation beast of the 80s was conquered when communism collapsed and millions and millions of people were freed from stifling restrictive and idiotic governance. For the following 30 years there was expansion of global productive capability leading to deflationary pressure in the West. But today those places are getting closer in economic parity with the West and their economies are unable to continue with the same rate of expansion. Inflation is coming back.

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Here we go again, same old story. The trading banks (Austrlian of course) will always try the markers to satisfy their own greed. Its patently obvious the world economy is struggling with significantly reduced shipping and transport services so the oldest financial rule book tells us of the supply /demand curve controls prices.
Thanks to RBNZ and Kiwibank taking a balanced position and who have stated this inflationary spike is temporary. Global deflation has become a permanent driver in world ecomonic for the last 25 years as technology leads the game and provides vastly lower priced goods.
Dont let the trading banks fool us !!!!

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Current unemployment rate of 4.7% is far from the absolute minimum and above pre-covid minima. Underlying inflationary rates are widely spread among factors.

There's very little reason to raise OCR unless it was to benefit banks' income.

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All of these back experts which get paid huge salaries have no idea what they are doing.
They have fun dating economy will crash in covid but it's the opposite. They keep saying house prices will drop but it's the opposite. I wonder why does banks even employ them?

They should let them all go and give me discount on back fees.
They are worth the paper they write their stuff on.

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'Inflation is a measure of value per dollar.' Here in lies the problem, we don't measure inflation we measure a made up index or many index which suit our narrative. If capital assets were included in the value per dollar then inflation would be very high but they are not. TVs phones cars they should be even cheaper than they are, if it were not for the low value per dollar. Any body that thinks we have had low inflation for the past decade ie the value per dollar is slowly decreaseing is measuring the wrong thing

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