Extinguishers at the ready.
The inflation fire looks like it may have died down a little from the scorching 32-year high 7.3% annual rate as of the June quarter, but that doesn't mean anyone should be suggesting the trouble is over.
We may have seen the peak of this inflationary cycle - maybe - but there's much more to this story yet.
The expectation is that Consumers Price Index (CPI inflation) figures for the September quarter to be released by Statistics New Zealand on Tuesday, October 18, will show a reduction from that stratospheric 7.3% annual rate.
The Reserve Bank (RBNZ), which is straining every sinew to dampen the fires by overseeing a whole series of jumbo sized interest rate hikes, is picking an annual rate of 6.4% and a quarterly rate of 1.4%.
I didn't yet have all the previews from the major bank economists in front of me at time of writing this, but the RBNZ's pick seems somewhat lower than other economists are thinking. Westpac economists, for example have a 1.8% pick for the quarter and 6.9% for the annual rate, while ANZ has 1.6% for the quarter and 6.6% for the year.
My sense is that economists have been possibly pushing their picks up a little in recent days, which is probably not encouraging. The surprisingly high food price figures released on Thursday (October 13), showing food price inflation staying at a 13-year high of 8.3% in September, would have certainly helped that.
Notwithstanding all this though, it still seems the inflation figure to be released in the coming week will see some sort of reduction.
The main reason we will see the annual inflation rate fall from the 7.3% peak is just quite simply because the September 2021 quarter figures fall out of the reckoning - and they were huge. Enormous. A 2.2% rise in the quarter.
So, a 1.4% or 1.5%, or 1.6% result for the September 2022 quarter, giving us an annual rate of 6.4% or 6.5%, or 6.6% is going to seem perhaps okay. But perhaps not really.
The key thing to watch out for will be the composition of the inflation, by which I mean literally where the inflation is generated.
The inflation machine has in the first instance been fired up by 'tradeable' inflation that's imported from overseas - think things like oil prices.
But increasingly in recent times domestically generated 'non-tradeable' inflation has started sending out a whole wave of heat too.
Wage rises (with average hourly earnings up 7% in the year to June) have warmed to the task, with the super tight employment market (unemployment rate only 3.3%) enabling employees to push for rises to match the rising cost of living.
The RBNZ as mentioned has embarked on a heavy duty cycle of interest rate hikes. It has jacked up the Official Cash Rate (OCR) from just 0.25% at the start of October 2021 to 3.50% currently. The five consecutive 50-basis-point OCR hikes are unprecedented.
Another 50 point rise is expected at the November 23 OCR review.
I'm increasingly of a mind to think that the RBNZ might pull out the even bigger guns and go for a 75-pointer.
The inflation figures out on Tuesday, plus labour market figures (unemployment and wages) on November 2 will have a big influence on the RBNZ decision.
To get back to that non-tradeable/tradeable inflation split, it's worth tracking where we are.
Here's what Stats NZ had to say on the subject when releasing the last CPI figures for the June quarter on July 18:
The tradeable inflation rate, which measures goods and services that are influenced by foreign markets, was 8.7% in the year to the June 2022 quarter – the largest annual movement, either up or down, since the series began in June 2000.
Petrol; diesel; and milk, cheese, and eggs were the biggest contributors to the movement.
Domestic, or non-tradable inflation, was 6.3% in the year to the June 2022 quarter, the highest since the series began in June 2000.
Higher prices for construction, rentals for housing, and ready-to-eat food were partly offset by road passenger transport and rail passenger transport.
Non-tradable inflation measures goods and services that do not face foreign competition. It shows how domestic demand and supply conditions affect consumer prices.
The point to note is that the RBNZ can't do a whole lot about the 'tradeable' inflation. Realistically, it really just needs to wait for the impact of things like oil price spikes to abate.
The expectation is that tradeable inflation is now set to fall quite swiftly - although it has to be said that with the global situation so volatile there are any number of things that could upset this expectation.
But taking this giant caveat in our stride, we can see that the RBNZ is expecting the annual rate of tradeable inflation to drop to 6.5% in the September quarter from that previous 8.7% figure, and then to drop further in the December quarter to 4.9%.
However, the RBNZ's picking the 'non-tradeable' inflation - the stuff we're generating ourselves here - to have an annual rate of 6.3% as of the September quarter.
Now that's exactly the same - IE no reduction - as was recorded for the June quarter. For the December quarter the RBNZ's picking that non-tradeable inflation will have dropped - but only a little - to 6.2%. And by March the RBNZ sees the figure falling again only slowly to 6.0%.
So, in other words, the RBNZ reckons that domestic inflation is going to be 'sticky' as economists like to say. It's going to hang around.
This is all very significant, because it is the domestically generated inflation that the RBNZ can really do something about - by squeezing those interest rates. It has some measure of control over domestic inflation. It has the means - albeit blunt instrument (OCR) ones - to bring domestic inflation to heel.
Which is all a very long way around of saying that it is the non-tradeable figure that will really need looking at in Tuesday's CPI release. If this figure was to rise - even if the tradeable figure drops a lot - then alarm bells will go off at the RBNZ.
It's fair to say that amid the strong rises in overall inflation that we have witnessed in the past year, the very strong rise of domestically generated inflation has been a big and most unwelcome surprise.
As mentioned earlier, this has now manifested in some pretty meaningful wage rises, with average hourly rates up an annual 7% as of the June quarter.
The RBNZ's not expecting the wage rises to ease off any time soon. It is forecasting that for the September quarter (figures to be released on November 2) the annual hourly wage rise figure will be 8.3%. And this is expected to ease only slowly - still forecast to be 7% by December 2023.
Of course if there's any upside shock in the coming non-tradeable inflation figures then this will put further pressure on wages, particularly if the jobs market stays tight.
All in all the jury is still very much out on whether the RBNZ has 'got this' and whether the inflation genie that has been unleashed in New Zealand can be persuaded back into the bottle. If it can't then the RBNZ may have to apply some brute force - through a higher OCR than it wants to apply.
So, all eyes on what the inflation figures will bring on Tuesday. It's important.
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