If there is anything that might derail the Reserve Bank's efforts to rein in inflation, it is the strength of the labour market.
I've said for a little while that at the moment it's the labour market figures - both the unemployment rate and pay rates - that are the vital statistics to be watched, more so than actual inflation itself. And that's because we are very much on the cusp of the dreaded wage and price spiral.
The situation we are in at the moment is extremely unusual. Normally when you see the kind of economic turmoil we've had, unemployment goes up. Our unemployment rate has gone DOWN to super-low levels. And that's creating pressure.
The Reserve Bank (RBNZ) actually needs to see unemployment rise and for the pressure for higher wages to ease in order to successfully begin to control inflation.
Right at the moment, there's no guarantee at all that the RBNZ will be able to get the labour market to do what it wants. If it can't it may be forced to push interest rates higher than it currently intends.
I think the risk here is that our inflation is going to become 'baked in'. The fact that people have been able to use such a super-tight jobs market to engineer for themselves meaningful pay rises means they can go a fair way towards making up for the higher cost of living we've seen developing over the past year.
That means they will keep spending, business in the economy will remain brisk enough, and companies will be able to keep putting up their prices. And so it goes on. People will expect inflation and so we will have inflation.
The RBNZ is desperate right now to get on top of this as soon as possible so that those inflation expectations are not allowed to develop. But whether it will be able to do that remains very much in question.
The risk is that we are now moving into a period in which inflation is with us on an ongoing basis in a way in which we've not seen for decades.
Inflation, lest we forget, came in at a chunky 7.3% (annual rate) as of the June quarter. More recently we've seen food price inflation hit a high of 8.3% as of August.
The next Consumers Price Index (inflation) figures for the September quarter are set to be released by Statistics New Zealand on October 18.
It's worth pointing out that inflation for the September 2021 quarter was a truly momentous 2.2%. It's the September 2021 quarter that has really been pushing up the annual inflation rate this year. Now of course that 2.2% figure is going to come out. So, the annual figure is going to drop, probably by a reasonable amount.
The RBNZ is forecasting inflation for the September 2022 quarter of 1.4%, which will give an annual rate of 6.4%.
So, inflation is going to start coming down. That's generally accepted and expected. But how fast and how far will if come down? That's the real issue.
The RBNZ's forecasts for inflation as shown in the central bank's August Monetary Policy Statement (see table below) have the 'headline' CPI figure falling back into the bank's targeted 1% to 3% range by June 2024.
But of course there's two specific parts to inflation - the domestically generated 'non-tradeable' inflation and the overseas generated (think things like oil prices) 'tradeable' inflation.
The RBNZ's forecasting our imported inflation will drop sharply. It hit 8.7% for the June quarter. But the RBNZ reckons it will be down to just 2.3% by June 2023.
However, domestic inflation's a different story. It was 6.3% as of June this year - but it's forecast to fall only slowly to 5.4% by June 2023. In fact the RBNZ doesn't forecast domestic inflation alone to drop under 3% till June 2025.
So, here's where the labour market comes in.
Make a note of November 2, 2022 in your diaries. That's when the next labour market figures, for the September quarter - including unemployment and pay rates - are released.
Unemployment as of June was just 3.3%.
The RBNZ is forecasting that the unemployment rate will again be 3.3% for the latest quarter, but then blip up to 3.5% by December, over 4% by June 2023 and 5% by early 2025.
So, they ain't going to say it, but the RBNZ folk actually want and need some, ahem, slack to develop in the labour market. People need to lose their jobs in other words.
The tight as a drum labour market we have at the moment is seeing workers able to push up pay rates.
Average hourly rates, according to Stats NZ, rose 7% in the year to June.
The RBNZ is conceding that there's more to come on this. It's forecasting that average hourly rates will see an annual rise of 8.3% as of the September quarter, and there will also be an 8.3% rise in the year to December too.
After that pay rises are forecast to slow only gradually, with the annual rate dropping back to 7.3% by June 2023, 6.4% by June 2024 and 5.2% by June 2025.
As you can see, the RBNZ is not expecting pay rises to magically dwindle to nothing. But it is expecting them to reduce. And for that to happen it needs to see headline inflation falling and the extreme tightness in the labour market easing.
These forecasts I've described from the RBNZ all feed into its current forecast of the Official Cash Rate peaking just above 4% by the middle of next year - but then holding at around that level till late 2024. So, by implication, if the RBNZ's wrong about the unemployment rate and pay rise levels, this will change what it needs to do with the OCR.
And there's plenty that could go wrong with how the RBNZ sees things at the moment.
First up the global situation is so volatile that there's plenty of room for upward surprises in the amount of imported inflation we get in the months and years ahead.
And then what about the anticipation from the RBNZ that some slack will start to develop in the labour market? What if it doesn't? There's plenty that could go wrong in this area too, not least the possibility that increasing numbers of people that might get attracted to Australia - which also has a labour market as tight as a drum.
So, if the labour market remains as tight as it is and pay rises remain elevated then there is the risk the RBNZ has to do more with the OCR than it currently intends.
The RBNZ seems at this stage very confident than an OCR of around 4% for a reasonably extended period will do the trick.
It will be forced to change its mind if the labour market doesn't start to cool down and those pay rises don't moderate. This is going to be the big issue to follow next year.
The worst case scenario might be if we see the RBNZ being forced to keep gradually increasing the OCR over an extended period of time - and therefore for mortgage burdens to keep increasing.
The dreaded 'Stagflation' remains a very live possibility.
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89 Comments
Anecdote:
A mid-manager at a firm my daughter works for (infrastructure construction) was offered $20k, plus better perks, to move to the opposition. His firm immediately countered with "$40k to stay!". He's now in discussions with the firm that tried to poach him.....
That, is coming to all workplaces across the country. So to anyone who still thinks a terminal OCR of 4.75% will sort this mess out, I'd suggest they think again.
Wage increases are retrospective. It's an increase to cover inflation that has already happened. If our wages had kept up with house prices and living costs, then they would be nicely matched and move in 1:1; but they haven't and they don't.
What people saying "we have to cool the labour market down" are really saying is "Employees should carry the can for price increases over the last 12 months, even though we've already banked the profit from it and the wage increase is a going forward expense that we can budget around".
As stated previously, this argument is 'heads I win, tails you lose' for workers. There's not enough to keep up with increased living costs during a boom and there's no money in the kitty when inflation hits. Either way, they end up holding the bag and going backwards, and then they get the blame for trying to claw back (some) purchasing power.
RBNZ will really have an uphill struggle trying to fight demographics and create slack in the labour market: https://data.oecd.org/chart/6OVm
Does the bad policy theory apply to NZ?
The bad policy theory believes that stagflation is often the result of bad economic policy. The central bank's and government's attempt to regulate the economy often leads to them making the wrong choices. For example, prior to the 1970s, the U.S. was focused on maximum employment across their economy after the Employment Act of 1946, which inadvertently caused inflation to increase and impacted employment and growth.
Govt and RBNZ have created a real mess.
They have protected lazy debt at the expense of productively and allowed a huge bubble to inflate. The main winner being bank shareholders. In a decling workforce market we are promoting future tax payers to exit for a better opportunity and disincenting foreign workers from arriving.
DTI has to happen to stop the misallocation of capital, and save future tax payers from endless exploitation by speculators fronting bank profit.
Both effectively foreign puppets, captured by a thought framework designed to give power to specific overseas groups. Key's intellectual framework supported exploitation by the US banking and finance cartel. Ardern supports the centrally planned global economy via "climate change" deception, so more global bureaucratic dictatorship by stealth on the model of France. Elysium for them, serfdom for you.
The current era seems to have an intellectual framework designed to capture each personality type and turn us all into willing serfs. So question where the ideas you believe in came from. Are they a carefully crafted framework that appeals to your nature? Personally I find the ones that exploit our natural goodwill the most repulsive. You are more likely to spot the greedy than the sociopathic manipulator.
"The essence of propaganda consists in winning people over to an idea so sincerely, so vitally, that in the end they succumb to it utterly and can never escape from it." Joseph Goebbels
I hardly think the previous government were any better! National got elected claiming they would cool house prices (we bought our house on full section in Auckland at that time for under $400k), then did nothing at all for about 6 years while prices skyrocketed, then put Nick Smith out in a paddock with a clipboard. All up our house went up over 300% under National, Bollard and Wheeler, John Key said that was a great thing. Labour actually had house prices under control until Covid.
House prices rise faster under Labour governments than they do under National, so there's that. As for 'under control' - markets were hitting peaks in Dec 2019 before Covid stopped everything as people realised Kiwibuild was a bust and the Government was just outbidding FHBs on new builds so they could say they delivered something, anything. If you want to start reading from the history books, try flipping the pages back prior to November 2008 and see what was going on with house prices in the preceding decade.
Wage inflation has been running very hot this year.
However I expect that it will have subsided substantially by this time next year, once our economy slumps and unemployment starts rising significantly.
Aussie economy isn’t looking great either and I expect there will be quite a few kiwis returning to NZ looking for work over the coming year.
Could be the icing on the cake there HM for the housing market....after 18 months of falling house prices due to increasing interest rates, then comes the rising unemployment as deflation arrives, just to finish it off as the reverse banks start cutting rates.
Right when people are on their knees with rising interest rates and cost of living, with their house prices down 30%, then people start losing jobs and default on mortgages/rents.
This is the worse case scenario, but its a possibility.
Yep that's my position IO.
And in my opinion, how bad unemployment gets (and how much house prices fall) will be strongly related to how high the RBNZ takes the OCR.
If it stops at 4%, I see unemployment peaking at around 5.5 to 6% by early-mid 2024.
If it goes to 4.75% or higher, then I see unemployment going to *at least* 7-8%, peaking mid to late 2024.
The potential surge in kiwis returning to NZ from Aus is a big elephant in the room, and no one seems to be talking about it. Which is curious.
Perhaps it's because the labour market is still so tight there.
But construction has started tanking there quicker than here (maybe because most of their interest rates are floating), and I imagine there's quite a lot of kiwis (without Aussie citizenship) who work in that sector... And more broadly for the Aus economy, there's predictions of real economic weakness through 2023 (yesterday I saw a forecast of a measly 1% growth in GDP across the 2023 calendar year)
Normally a recession is driven by job loss that destroys consumer demand, but in NZ there are so many empty jobs.... what if the economy has to destroy these jobs first before much loss of income occurs in the consumer world.... as people just move, that would have to be quite a deep recession.....
So workers are finally gaining some strength and receiving the wage they are entitled to. And this is a problem, why? Has a low inflation, low wage system benefitted anyone below the middle class? The Fed Reserve, followed by all the Western Reserve bank poodles, is still somewhere in the 80s in its regressive policy. Time for a new way of thinking than the hammer of interest rate increases to drive workers back in place and return power to the bosses.
Hmmm. The no1 drivers of inflation are misallocation of capital, and wage inflation.
Wage inflation gives most employers 2 options, raising its charging model (inflationary) or closing down is a planned or unplanned way (bankruptcy). Being paid more when the most of everything you consume is going up in price is a zero sum game.
The bottom line is the balance in the economy is out of whack thanks to speculation, aka misallocation of capital.
Absolutely - we have excessive debt relative to productive capacity and income. If we let the free market be free, it would correct itself. But we have central banks and governments focused on protecting asset owners and making the problem worse.
But it looks like the Fed has lost control of the ability to protect asset holders now ....the forces of the market can be skewed periodically, but not forever.
Market fundamentals always win in the long run...that is the amount of debt one household, business, local council or country can carry relative to its productive capacity/income generating ability.
Absolutely spot on, tbh. Plus also that house prices going down would lead to more investment in businesses/productive enterprise given the huge amount of household debt now baked into the system. Can't see many people forgoing years of stable salary to put the time into a business that is statistically likely to fail without turning a profit.
If anything, it may well concentrate entrepreneurship even further in the hands of those who can afford to try starting a business and who don't have to worry about paying down a stonking mortgage.
Of course if it all unwinds then people may not have any choice in the matter.
Around 75% of company income tax is borne by employees in the form of lower wages. So even those who don't start businesses benefit from a regimen that incentivises productive enterprise rather than speculation on land.
People are right to say "tax what you want less of", which highlights how mind-numbingly absurd it is that we have taxed productive work heavily while giving land speculation a free ride. It has created this unbalanced economy and fraying society, and fosters an underclass lacking in hope thus aspiration.
I absolutely understand the importance of price stability. I also understand the importance of being employed and paid appropriately. In the 70s and 80s it was an absolute relativity between unemployment and high interest rates. Why? Because of the high population of working age people I.e boomers. Now, we are in a different dynamic. High employment but fewer workers due to boomer retirement. High interest rates will not quickly lead to employment stress. RB will have to crash the economy badly to achieve that. There must be a more intelligent way. This is not the 70s/80s.
We need to be very careful relying on anecdotal evidence and hourly earnings data to tell us what is happening in the labour market or the economy more widely. What we have seen over the last 12 months is an adjustment to the price level being driven by:
- things being more expensive to produce, distribute and sell (more labour required, higher energy costs)
- financial speculation pushing commodity prices up
- opportunistic profiteering
Obviously, labour costs are responding to this adjustment - people can't afford the things they need and this is leading to employees pressuring employers for pay rises. However, three important points to make here:
- Pay deals are not compensating employees at anything like the amount required to keep up with cost of living - actual median weekly earnings have increased by just 2.8% so far in 2022. The growth reflected in the annual figures took place almost entirely between Oct 21 and Apr 22
- Lower earners have seen basically no increase in earnings during 2022 (0.8%) - higher earners have seen increases of just 3.2%. The idea that we are on the 'cusp of a wage / price spiral' is madness. Any increase in hourly wages is being offset by companies reducing labour costs in other ways - look at how many restaurants are closing on quiet days for example, or how many kids are working short hospo or retail shifts
- it is higher mortgage costs (driven by aggressive OCR hikes) that are quickly becoming the biggest pressure on wages. The only place we are seeing growth in earnings is amongst upper quartile earners who are more likely to be feeling the heat from mortgage costs. The idea that increasing rates further will lower this pressure is crazy
But, never mind the nuance, let's keep sucking demand out of the economy and throw 50,000 people onto the dole because... I don't know... reckons.
RBNZ has no one but themselves to blame. If it was a private organisation and were to be held for for accountability, would have been fired but here they lose nothing but enjoy the perks.
Now they should not try to cover up (As cannot also, if they do try) and catch the bull by the horns as cannot avoid the pain, earlier the bertter to get on path of normalization but yes cannot avoid bloodbath.
'Now they should not try to cover up'
They and the politicians wont bother - they just point to the fact that 'everyone else was doing it' as an excuse. The mainstream media dont seem bothered to call them on it. Unbelieveable we wont accept that excuse from a child, but these days we will from our leaders.
Oh look, prices are up 10%......everyone 'give me a 10% pay rise to cover prices'
Oh look, prices are up 20%.....everyone 'give me a 20% pay rise to cover prices'
Oh look, prices are up 50%.....everyone 'give me a 50% pay rise to cover prices'
Oh look, we live in the Weimar Republic.
(prices drive wages and wages drive prices in a feedback loop)
How many times a week do you want to change the prices on your restaurant menu? How many times a week do the supermarkets have to change the prices on all the items on the shelf? How do you balance your company books with inflation running at 50% p.a.? Do you want to carry about a thousand dollar note to buy milk at the dairy?
I understand your point about there not being a default/cash flow problem if wages match price changes across the economy.
But the practicality of operating an economy with high inflation is very problematic. Hence the RBNZ's mandate of keeping inflation very low so that we don't have to deal with those problems.
The oft-quoted hyperinflation episodes (Weimar, Venezuela, Zimbabwe etc) all have a particular set of circumstances that simply don't apply to modern sovereign state economies. The closest we have seen to runaway inflation (1970s) was caused by a sustained supply-side shock (OPEC) that started to spiral with wages and prices because of index-linked pay and strong trade unions. Again, those conditions don't apply any more - wages are too sticky and labour unions are weak.
Interesting your comment on unions. I understand they just got a 12% wage increase from Sanford.
A client of mine is a transport co. The unions turned up a fortnight ago and demanded a 15% wage increase for drivers or they are going on strike.
Feels to me like Labour are deliberately preventing immigration so they can keep unemployment at a low level and drive wage bargaining through for their Union mates.
Actually, the Weimar inflation issue was caused by excessive war reparations imposed on Germany after WW1. They printed money so they could pay them. We all know what excessively printed money does.
The solution lies in decreasing the money supply. As cash disappears so will inflation and there will not be a wage/price spiral.
Meantime over the ditch the Ozzie Central Bank has gone bust on bond losses , Wonder how ours is holding up? Seems like they will fall back on the art of printing ...lol
https://www.reuters.com/world/asia-pacific/australias-central-bank-has-…
The Reserve bank are political appointees and both they and the government have done a disastrous job. Labour believed it has received a mandate for everything after having being lucky enough to have the election come up during an epidemic, when in fact Kiwis were simply being practical. Business owners in NZ are planning a massive rejection of Labour at the next election and until then, many are already planning redundancies. The temporary effects on employers of low unemployment will evaporate as quickly as they arrived. Nz is not a socialist country, it's a country of entrepreneurs, tryers, and doers.
Business owners have never backed Labour.
It's becoming increasingly obvious our RBNZ and attached government appointees are really just steering in parallel with a much larger system. Rates down or up, capital gains tax or no, NZ was never going to be far from the place we're in - all the pressing issues are baked into the system.
What'd be more interesting is how we'd fair gravitating away from it.
There are plenty of people in the 18 -60 bracket who consume and dont do anything for the countrys productivity. I am sick of lets bash the superannuitants posts. We can easily get unemployment up by sacking the useless politicians and swarms of bureaucrats. In addition there are hordes of road cone placers and pickers up who add only congestion to highways.
Sorry, but in a country that expects me to repay a student loan, pay through the nose for a house and cover increased mortgage costs because it gave property investors steroids in the form of revoking LVRs AND save for my own retirement and cover the increasing costs of childcare (the ECE subsidy hasn't been reviewed for decades), a $15b prize fund for the stunning achievement of turning a certain age is somewhat immoral.
I cant figure why anyone sane would think raising the unemployment rate would benefit the current economy. There are other measures that would be more effective at restraining inflation but I will wait for the brainiacs who get paid substantially more than myself to trip over on them...maybe...lol.. RE has one big problem and that is it is spectacularly overvalued , zeroing out general inflation alone will not save it ,until it realigns itself with the pockets of the average earner ...its more of the same. Top shelf might do better but mainstream is in for a shake up. In case you havent figured it out...welcome to 'the correction'.
Its not the pockets of the average earner, but the pockets of the median household income that it will realign with, which unfortunately is higher than the pockets of the average earner.
Not to say property is not overvalued, but don't believe it will fall to that level.
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