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New inflation figures out in the coming week are likely to show us having an annual rate of inflation in excess of 7% for the fourth consecutive quarter - but will there be signs that we can expect prices to start easing soon?

Business / analysis
New inflation figures out in the coming week are likely to show us having an annual rate of inflation in excess of 7% for the fourth consecutive quarter - but will there be signs that we can expect prices to start easing soon?
inflation balloons
Source: 123rf.com. Copyright: nakhin

Chances are that New Zealand is about to see its fourth quarter in a row with an annual inflation figure that has a ‘7’ in the front of it.

It seems hard to believe when you consider that just two years ago the rate was 1.5%. Inflation, what's that? We used to say.

But I guess we are getting used to it (high inflation) – although the very fact that we are is something that is troubling the Reserve Bank a lot. That’s because such an elongated period of actual inflation is giving rise to the dreaded ‘inflation expectations’ whereby we cause future inflation simply by expecting it. Bad us.

Of most interest when the Consumers Price Index (inflation) figure for the March quarter is revealed by Statistics NZ on Thursday, April 20, is whether we will see a new peak in this inflationary cycle.

For the June quarter last year annual inflation hit a 32-year high of 7.3%. Then for the next two quarters it was 7.2%.

So, any chance this time it will actually go higher than 7.3%?

Well, the Reserve Bank is forecasting that annual inflation will hit exactly 7.3% again, with 1.8% for the quarter.

At time of writing I didn’t have any economists’ previews in front of me, but most of the big bank economists seem at this stage (pending final picks) to be in general agreement with the RBNZ about where that annual figure will be.

Since inflation started soaring in 2021 a constant theme is that it has been stronger and for longer than has been forecast.

Ideally with all the heavy lifting the RBNZ has been doing against the inflation – an eye watering 500 basis points worth of hiking to the Official Cash Rate (OCR) since October 2021 – we would want to be seeing inflation start to come back by now.

But here’s where a few things have definitely started going against us. Fuel prices were lower in the March quarter – but of course that’s reversing again now, the impact of which will be seen in the inflation figures for the (June) quarter we are now in.

And then there was the weather. The RBNZ’s bothered by how inflationary the Auckland Anniversary Weekend deluge, followed by Cyclone Gabrielle, will prove.

Already we’ve seen the impact of people being out spending to replace items that have been ruined – which must of itself be potentially inflationary. Rebuilding will be inflationary. The Government spending that will be unleashed on the big repair job is itself likely to be inflationary.

Then what about food? We get the monthly Food Price Index released by Stats NZ on Monday, April 17%*. The figures for February showed annual food price inflation running at 12%, which was the highest level since 1989.

It would be an optimist indeed that would pick a lower figure for March, given the huge supply disruptions caused by the weather events. The Food Price Index makes up a touch under 19% of the Consumers Price Index, so, it’s important (housing and household utilities is the biggest individual component of the CPI). If food prices have risen a lot during March then this could be what helps tips the CPI figure back up to 7.3% or higher.

None of which sounds encouraging.

We are going to need to look at details within the CPI, avoiding what the economists like to call ‘noise’ caused by such things as the weather events, and see if we can see signs that inflation is in fact about to start easing.

The RBNZ thinks that it will.

It is forecasting that the June quarter will see annual inflation ease to 6.6%, then 6.2% by September, then 5.3% by December 2023. The RBNZ is forecasting that inflation will be back into its targeted 1% to 3% targeted range by September 2024.

However, and it’s a fairly big however, that forecast was made by the RBNZ in February. Since then it has had a rethink about the inflationary impacts of the weather events and believes now that they will be stronger than it first thought. So, it may well be that the RBNZ is seeing a somewhat slower path back to the 1% to 3% range than it was thinking in February. We shall have to wait and see on that one, with the RBNZ due to release its next range of forecasts in its Monetary Policy Statement on May 24.

The common expectation currently is that the RBNZ will do one more (25-basis-point) increase to the OCR on May 24, taking the OCR to a 'terminal' peak in this hiking cycle of 5.5%. 

But when will it start coming down? Well the RBNZ's going to have to see some solid signs that inflationary pressure is easing. But there is more. It will also want to see signs that those nasty inflationary expectations are abating as well. To that end, sandwiched in between the CPI release and the next OCR review is the RBNZ's own Survey of Expectations on May 12.

This survey of a relatively small group (usually 30-ish) of business leaders and professional forecasters seeks views on where the participants see inflation in a year, two years, five years and 10 years. The survey acts in a sense as a snapshot of the credibility of the RBNZ's efforts to rein in inflation. If the expectations of future inflation go up, the survey participants don't think the RBNZ has things under control. If the expectations are coming down (as they did in the last survey) then the RBNZ is heading down the right track. The RBNZ will want to see those expectations drop further in the next survey on May 12. The survey participants will be influenced by what they see in the March quarter CPI figures.

So, anyway, the coming week's inflation figures may well not be pretty (yet again). What we will want to see though is at least some small encouragement that there is light at the end of the tunnel. Preferably light that isn't being given out by an oncoming train.

*UPDATE: The March Food Price Index showed an annual increase of 12.1%.

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120 Comments

We have big problems in NZ. Decades of people using their mortgages like a slush fund to purchase whatever they desire, poor savings habits, an unshakable belief that house prices always go up and the massive QE over the last few years pouring a tonne of fuel onto this fire.

Now the RBNZ are back peddling and hiking rates like a madman however the banks are starting to wear these hikes to maintain/increase their customer base.

And all of our problems are still there, simmering away or getting worse in an election year where we will get no hard and fast action, honesty or competence...........just smoke and mirrors in order to get into power at any cost.

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58

Agree and the trade deficit is out of control.

Even if you aren’t considering leaving NZ you could be sending/investing money overseas before the exchange gets a lot worse.

We need the election to be focused on returning commercial disciplines across government departments and a back to basics approach to improve outcomes in Health and Education.

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31

Luxon actually has the right approach. He needs to do very little, sit back and let Labour destroy itself.

Over spend, elitism(cogovernance), alledged corruption,  support for unelected undemocratic distrusted councils (Tauranga), projects over budget and years behind track...

If labour even get to the election without self destructing it will be a miracle. They promised too much to too many people and now have no cash left in the tin and cant even begin to deliver anything without upsetting someone else.

Problem is that national is likely to be as bad for different reasons. They will get in without needing to be clear on their intent. Which is dangerous. 

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25

If National where honest about how bad things are, they would be labelled as DGMs.      But things are really bad.  Much as many in national say they just need to stop the wastage (which would be a good start) just redirecting the wastage will not be enough to turn things like health and policing around.        Higher taxs AND deep cuts to "nice to have" policy ideas are required....      This will occur in a period of falling tax revenues. ie recession, oh and we have to make infrastructure better and build back better, yeah right

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24

We as an economy might have to start looking outward again and regain global competitiveness.

The Nats want exactly the opposite for us and will lower the threshold for shoddy businesses to import workers and grow our economy with a larger domestic consumer base.

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21

It's a worry, isn't it? No matter who we vote for will end up putting New Zealand in a worse place, and between the two I am honestly not sure who is worse. Im growing increasingly concerned for this country's future and I was already pretty pessimistic.

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12

Agree but labour win the worst with co-governance and their education shambles……have a look at what they are going to be teaching kids. I think it’s fair to say Hitler would be proud of the indoctrination 

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7

Famously a fan of sharing power with different races, he was.

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0

No but famously favouring certain races and removing democracy. 

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3

Regarding health, the system is not the main the problem - it's excess demand.... Poor population health.

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12

I wonder how many labour voters out there are not voting for labour this year? I think there will be a few.

And how many people are saying fark this co-governance shit and fark this government and leaving NZ for good (taking their cash with them).

What ever happened to a balanced budget? What ever happened to working hard and you will succeed? What ever happened to affordable houses?

Something is very very wrong with the country and Labour and National have alot to answer for. 

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4

After decades of various finance ministers and RBNZ governors quite correctly bemoaning the lax and lagging saving record of NZr’s in general along came covid and the current two then did a complete 180. NZr’s were urged to borrow to spend, supposedly to save the economy. And he we all are now.

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25

The shift in narrative from monetary and fiscal policy leaders from produce and save to borrow and spend came long before Covid. When it wasn't enough we began importing consumers from elsewhere.

I made a mental list of the 30-40+ friends and acquaintances of mine who moved to NZ within the last decade. Can hardly think of anyone who works in areas of genuine high skill shortages or high-value exports.

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19

Trust Grant Robertson, who has a Arts degree to be NZ's CFO? What a joke. 

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1

$153,333.00 per wallaby kill doesnt look good either. Thank god they only killed 18

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0

Mortgage slush fund? But isn't that what the advertising industry and their clients have trained us to do over the last few decades?

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7

"QE is an asset swap: it does not create new private-sector assets, which is how some may understand ‘money printing’ descriptions. Nor does it involve spending money in
the sense that fiscal policy does. No private-sector banks, firms, households or governments end up with higher net worth from QE transactions themselves".

Link,

https://www.bankofengland.co.uk/-/media/boe/files/speech/2023/april/qua…

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QE increases available funds in the private sector. The Reserve Bank buys bonds (usually government) from private institutions (banks/ pension funds) with printed/ electronic dollars. These Private institutions have increased cash reserves this ends up in asset markets, such as the sharemarket or is loaned out to consumers/ businesses. So we have increased spending in the economy, more imports, and increased malinvestment, driven by low rates, resulting from Reserve Bank purchases of bonds.

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1

One thing's for sure - the economist will get it wrong & be surprised...

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28

Meanwhile over in the UK its the central bankers worst nightmare of an out of control wage/price spiral. Half the countries workers are demanding pay rises of 10 to 35% (doctors on strike for 30%). This is what makes central bankers break out into a cold sweat. Hopefully our Shock and Orr rise in interest rates will avoid this in NZ. Have been listening in a bit on LBC radio UK, interested in the feeling on the ground over there, its pretty grim. 

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17

In the majority of cases in the uk .. who can blame them. Innflation at over 10% and years or being underpaid. They see the rich who have done well under the tories and expect to be at least fairly paid to afford to heat their homes (nurses, police, transport workers etc..)

.. less so their doctors..

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6

Inflation.. What inflation. 

Have you seen how busy the markets are these days. Can't find a car park. Roads are piled up with new shiny Ute's speeding around like its no man's business. 

People are paying premium prices for crap houses. 

There is a lot of money around mate and no one cares if they are paying more for things. 

The old economic books need to be torn up and burnt. A new economic model needs to be set up. 

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Agreed, theres still a lot of activity out there from what I see.

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(Mauldin. So the USA is pretty much the same as us or vice-versa)

In each of (the recent) inflation regimes, the economy adjusted. Will the same happen this time? Probably… but how we deal with it matters and will look different.The March data supports something that was already becoming clear: Inflation is more and more about housing prices. Food and energy remain expensive, but consumers have more control over that kind of spending. They can buy cheaper brands, drive less, adjust the thermostat, etc. Housing prices are mostly static unless/until you move, which is difficult and often costly in itself. And everyone needs some kind of home.Housing inflation in turn propels other prices higher. Service workers who can’t afford to live near their jobs have to demand higher wages to cover their commuting costs and time..All this feeds on itself and will, I think, keep inflation well above the Fed’s 2% target.

https://images.mauldineconomics.com/uploads/pdf/TFTF_Apr_15_2023_.pdf

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13

Nailed it

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Yep, housing and transport are the main drags on our productivity. And neither are to do with National or Labour, it is the entrenched attitudes of New Zealander's that are to blame for this. Houses are financial assets not homes and we need to drive everywhere and invest in moooaaarrr roads. 

Labour and National just enact the wider population's desires in this sense. I would say that at least Labour say they want to change this whereas National want to double down on it. So in that sense National are far far worse. 

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19

Yep housing. Look around for the impact on volunteer roles like sports coaching, rural fire and ambulance etc. Many working 2 jobs to just feed themselves and pay their debt bloated rent or mortgage.A bloat that burdens every hand that touches every aspect of society, and is the secret engine of inflation.

Cut the bloat. 

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14

For the first 18 months the theme was "transitory". How many years above 2% is transitory? Seems like about half a decade, if we're lucky. 

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25

Let me introduce you to the new word of 2023 - "sticky". As in "Inflation will be sticky for about a decade and a half".  Maybe longer if none of the global central banker's are willing to go full Volcker.

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6

Chippy: ‘ Look, we’ve had a 1in a hundred year flooding event. Of course this is going to increase the price of fruit and vegetables. The cyclone recovery has required the Government to spend large amounts which unfortunately contributes to our inflation. But we’ve pushed up the minimum wage and record numbers of NZers now get some form of support.’

Gullible kiwis:’ Ok.’

The smart leave, the old and dumb stay (I’m old).

Aotearoa-the cluster f?ck remaining of NZ

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8

Cheer up, Ol' Fella!

New Zealand is doing something about it, unlike the majority of the rest of the 'developed' world.

We've started to change. Or to be more precise, the RBNZ is leading us by the nose to do what has to be done. It's going to hurt - especially those who refuse to accept what's happening - and it will take a while, but 'what we had' has come to an end. It's over. Gone. Finished. And when it's all done and dusted, New Zealand will have led the way to a more sustainable economic system. One based on effort and not speculation, in short.

(And no, That's not sarcasm!)

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25

"And when it's all done and dusted, New Zealand will have led the way to a more sustainable economic system. One based on effort and not speculation, is short."

I wish I shared your confidence after watching both National and Labour led governments over the last 3 decades gut out NZs economy to leave just a few eggs in the basket. Last time I looked the Public sector was nearly 40% of NZs GDP.

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27

Sounds pretty socialist to me.

The fact they take enough in tax and rates to be 40% of our gdp is frightening tho.

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3

I thought it was pretty concerning as well but I have looked it up and it looks to be about average in comparison to countries we would compare ourselves to. Looking at the list we are actually pretty low compared to other developed nations. A lot of Europe is sitting at near or above 60 percent. US and Australia are also higher.

https://en.wikipedia.org/wiki/List_of_countries_by_government_spending_as_percentage_of_GDP

Revenue percentage of GDP is at 36.725% which is also pretty typical for comparable countries.

In terms of value to money we get from all that, defintiely debatable, our public service doesn't seemt to be great at getting results on the administrative end. 

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6

Going to have to go back to our strengths, which has always been Agriculture....   

Tourism will still be a good earner if people can afford to come here.   

I think most of our foreign Education business was a buy a visa sham (those queen street based business courses...)

The regions may well recover before the big cities if this pans out.

Banking / finance will not be a great industry

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18

Or we could hit the economic gym and develop some new strengths, something with a bit more value add than letting cows eat fertiliser assisted grass and turning them into beef and their secretions into milk powder. 

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5

We could, but 40years on from the reforms of the 80s that were meant to do exactly that and.......

 

 

 

 

Nothing. 

Well not nothing, we've shifted from 60% primary exports to 82%. And none of the political parties occupying seats in parliament have any intention to change. Guess who the majority will vote for and expect change.

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4

Back in 2000, Helen made a big thing about growing a "knowledge economy". It was good timing and in the early days. But there was lack of follow through and support from govt and its many arms. Labour had been handed a growing economy by the Gnats, instead she was focussed on growing her own property portfolio and later becoming world leader 

They said that agriculture was on its way out. Luckily we've been developing and improving our agriculture and its got us through 2 decades since

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13

Hard to share knowledge around an economy when 40% of those coming out of high-school are functionally illiterate.

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28

Where did you get that stat from? Shocking and at the same time believable

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I actually misread that stat. It's 40% of all Kiwi adults, not just those finishing high school.

Pathetic!

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6

What are we doing wrong in our schools? Or is it just the bell curve in action? 

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0

Being a parent.

- 40% of kids dont turn up (truancy rate i think is highest in oecd).

- kid barely get homework til they are 15 and dont sit mock exams til the same age

- the homework they do get .. is overly complex and they dont know the background to the questions (recent question about how politics and science mix.. when they hadnt explained what politics is first. Great if u have parents that help..

Basically ifs un tatters. But we live in a world where we cant complain

 

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7

Last I read, kids in Finland don't really get homework either but they test at or near the top in international literacy and numeracy tests. 

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2

Lol.

The teachers will say that about everything now in NZ.  Kids dont need homework, or times tables, or rote learning, or discipline, or to come to skool or anything really.... Most the time it seems like even teachers coming to skool is a bit hard for the, to do.

..but even though their results are crap and their kids hardly show up - they obviously want higher wages , mor holidays, and less time in the classroom. And the results apparently arent their fault (probably learn their craft from the leaders of government, RBNZ and local government...  give handouts, take whatever you can and avoid responisbility or accountability)

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3

Source? 

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0

And we have an aged population. I wonder how the percentage varies over the age cohorts.

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0

I wonder what percentage of NZ adults went to high school in NZ.

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0

Yet there has been very little in the way of encouraging innovation or a knowledge economy from either party.

This speech from 2011 from Sir Paul Callaghan is a really good watch if you want to learn more about what New Zealand could have done differently (And could do differently). New Zealand has some amazing businesses in the high-tech value-added space. We have a world-class boat building industry, fisher and paykel healthcare are at the forefront of medical respiration tech, weta digital is potentially the best VFX studio in the world.

But all of this is despite of New Zealand not because of it. We don't encourage the type of business that grows economies and prosperity. Instead of investing in R&D and education, we made housing speculation the most tax-efficient way to prosperity. Rather than investing in productive enterprise, the government gives out rent subsidies to landlords and cash gifts to FHB's. 
We are competing globally and the government would rather spend effort and money renaming stuff to be more culturally sensitive than investing in education to prepare New Zealanders to compete in the global marketplace. To give them and us the best shot of prosperity. 

But neither of the parties even brings this up, they'll give lip service to increasing productivity but they won't actually put forth any policy that encourages innovation.

Labour is functionally useless and seems allergic to getting any actual results, National want to look to what we have done in the past and wants to support inefficient businesses and make it easier to speculate on property again, ACT would strip any potential funding away from R&D and leave it all to the free market, and the Green's, well they're the greens they don't seem to care about the economy.

I am honestly really concerned for New Zealand's future here. Our leadership over the past decades has not put us on a good footing for the challenges ahead and I could see it becoming a lot worse before it gets better.

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17

Great post. 

On R&D, pdl electrics and tait electronics both invested heavily

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6

Absolutely beautiful.

And when you realize NZ is farked, you just pack up and leave. We are dreaming if we think this country will get better. Since 2008 it's been a slippery slope. Thank you John and thank you Jacinda for borrowing to the hilt.

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The MPs are in so many cases simply more property speculators rather than value creators too. So, very reluctant to incentivise productive business over land speculation.

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2

The only party with any gumption to do anything about this is TOP.  Because their policies are literally "make NZ more productive by discouraging the unproductive through the tax system".  Every other party is driven by ideology or special interests, not by sensible policies to encourage investment in more productive businesses.

But hilariously, nobody wants to actually give them a shot, mostly because they are idiotic enough to believe if they keep voting for the same policies that failed before, they somehow won't fail the next time. 

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7

That's because its been all words, we gutted our education system the the obvious driver behind any technological economy, the only other sector we truly encouraged has been tourism, basically hoping rich people would come here and spend their money.

We do not value intelligence but sporting ability, or just fame, think of as many recent NZ sports people as you can, who's entire contribution to society is might be running around a field with a ball really well. Now think of some famous NZ scientists. How many minutes of the news is devoted to sport, or what random act some celebrity has done, and how much to achievements that contribute to society.

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3

 

Monetarism is the disease and not the cure, it creates the problems in the first place that it is then trying to fix. Having our central banks controlling credit creation by the use of interest rate manipulation, first hitting the accelerator and then jamming on the brakes again when it all goes wrong and this then causes our boom to bust economic cycles. 

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3

Agree about our slack attitudes.  I would add also to the list our firm belief that if individuals can't afford things the government can.

 

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3

One of the factors impacting hospitals at the moment is bed blocking by elderly and chronically sick people.   Many are from rest homes but many are also trying to live at home.   They get sick and need hospital level care, but then there is no where suitable to release them to.  The rest homes have very limited full hospital like care in their big houses.   These blocked beds cause delays and cancellations to planned treatments, thus further patient delays.   This is only going to get worse with our ageing population.   I am not sure how NZ is going to be able to afford to fix the health system

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17

Mobile treatment centers/surgical units and tent wards set up on sports fields?

Only need to get through the next 20 years then we will never have as many old people again. 

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We could also consider fixing the aged care system.

Start by looking across the ditch. We've recently placed an elderly relative into care in Queensland (NZ citizen, living there for 20+ years). Highly regulated: for eg care not more than 85% of pension, accommodation can be funded with 100% return of capital (& held by govt not home so can easily relocate rather than stuck with 1 corporate) or if assets <$55k totally Govt subsidized. 

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Agreed but to afford to do this we would need to rip up many of our fossil fuels and mineral resources to have the spare cash for it such as Australia does

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true that,and some can have behavioural issues and need bureau nurses with them 24/7.must be a huge extra cost on the DHB.

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Our businesses, especially the big ones, and the government ones still have pricing power.  And they don't put prices down.

Time for some radical "trust busting". Let's break up the cartels.  Give price power back to consumers.

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Reverting to 3% inflation, which we view as the upper bound for benign sustained inflation, is easy from 4%, hard from 6%, and very hard from 8% or more. Above 8%, reverting to 3% usually takes 6 to 20 years, with a median of over 10 years

https://www.researchaffiliates.com/publications/articles/965-history-le…

 

Interesting viewpoint, which suggests it may take some time for inflation to ease here.

 

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13

That band was a globalised world, globalisation brings competition and disinflation of prices.

if China Russia Iran Saudis want a bipolar world the band may be 3-5%

Oil / energy prices have been pretty stable for a long time.   Things are changing

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As inflation began to build, the powers that be thinking was that it transitory. They told us so, reassuringly. Trouble is it was the thinking that was transitory, not inflation.

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Sounds similar to putting on and then trying to take off weight 

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Using the annual predicted figures from the article, June 23 6.6 Sept 23 6.2 Dec 23 5.2, with previous 4 actuals, march at 7.3%. The bank expects inflation to be 4.7% June 5.6% September 3.6% Dec.

How likely is that? They would seem the sort of changes needed over a year rather than a quarter.

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2

US cpi is now 0.1 per month or 0.3 core inflation (excl fuel and one-offs)

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In the 1940's, when there were high debt/gdp ratios (i.e. war time economics/similar to now), there were wild swings between high inflation and deflation. It didn't take long at all for 10% inflation to turn into deflation. 

Quite possible we see a similar pattern in the 2020's.

 

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6

Shouldn't the headline say " price RISES should start easing soon"? Prices easing would be deflation. All indications are an energy supply crunch on the horizon and thus inflation remaining high, or increasing. OPEC cutting output, peak conventional oil, US strategic reserve emptying, shale revolution petering out, Russian gas not being supplied to Europe at all next winter. TSHTF later this year!

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Wasn't it supposed to hit last year WRT Russian gas etc? 

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If something was $10 in Jan 2022, $11 in Feb 2022, $11 in Dec 2022 and $10.50 in Jan 2023, then annual inflation for that item is 5%, even though MoM it is a 4.5% decline. 

By the logic of some comments in here that would justify rate hikes. Everyone is smart enough to see through it when annual house price numbers factor in growth long since reversed, I'm not sure why it gets ignored elsewhere. Ideology perhaps?

To measure the true impact of rate changes we need to look at MoM data. Not annual. 

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Bias towards rate hikes by non property-owner commentators 

 

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Sort of but there is a lot on noise and seasonal factors to lead one astray.

Renting houses is not really an industry, if it was the profitability could be measured by its tax contribution to NZ.....    yep not much contributed.

Building new ones, yes for sure.

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Did we get month on month deflation? I don't get it, house prices have been sliding continually either measured year on year or month on month....

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Seems like quite a myopic view of why we are having rate rises. As other commenters above have mentioned we have a record trade deficit which has a lot of major knock-on effects.

Deficit nations have to offer higher rates in order to attract foreign funds that would finance their trade shortfalls. Furthermore, as the deficit goes up, the rate of interest also rises.

Source here. You can compare us to Australia, Canada, the USA, etc but they all have much more robust economies based on better fundamentals.

We have put ourselves in between a rock and hard place. If we drop interest rates, imported inflation will go up and the NZD will likely drop. If we raise interest rates it puts more pressure on NZ businesses and Kiwis and the likelihood of a recession increases.

Decades of mismanagement and poor allocation of capital are coming home to roost. New Zealand has record levels of personal debt and very little to show for it. All the meteoric rise in house prices has done is reduce New Zealand's economic efficiency and forced consumers to pay more for pretty much everything. Imagine if all that money that was poured into property was actually directed toward productive businesses and infrastructure.

None of it had to be this way, but it is, so now we have to deal with it. You can only borrow so much from the future until something breaks.

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So as a nation we either produce (and export) more or import and consume less. The former will first require difficult structural reforms followed by years of careful planning and execution. The latter will be forced upon us eventually by global markets, as already visible in certain areas.

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Except the latest rate hikes had an opposite effect on the currency, the dollar dropped. Other players see a hard landing for NZ and are selling the kiwi not buying the high yield.

The Orrful Guvna has publicly announced there would be a recession so he is making sure there will be. He probably thinks its good for his reputation

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What do you think would have happened to the currency if we dropped or paused interest rates? Interest rates are a pretty blunt instrument but it's the only one the reserve bank has. Not sure what else we could have them do.

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FX markets are not buying the high interest story, as the initial jubilance quickly evaporated. Over the last 6 months we are up against our trading partners. Nzd is often overvalued imo so finding a new level. I'm happy with a lower dollar to benefit exporters.

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I can see what you're saying here but I would still expect the reserve bank to try its hardest to keep the NZD stable. As good as it would be for exporters we are as a nation extremely dependent on imports.
The pain of an extremely low NZD could very likely be worse than the pain we are feeling now with 'high' interest rates and could very well affect a wider percentage of the population directly, especially those with the least means who are already struggling with cost of living.

Honestly, I don't know what the right answer is. All the potential paths ahead look pretty difficult and more of an exercise in picking the least worse option than anything I would frame as "good".

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Currency dependant. I buy 4-5m of aud a year. Been good for me.

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New Zealand has always had inflation of around 7%, house prices have gone up 7% on average each year since 1992. It's just that everything else wasn't seeing the same inflation but it exists in the background, the financial market is just globally correcting itself and will rebalance.  Businesses make it worse by ensuring they get record profits during a time of downturn. We should be seeing companies profits shrinking during this period but the system we have is markets and profit must always increase overtime even though that is unsustainable. All gains in the current financial system are inflationary these days, as efficiencies have plateaued or are now significantly decreasing.

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Long time readers of Interest will know I'm not a perma bear or what some call a DGM.  Yet I see NZ being one of the countries that is going to suffer the most from the upcoming downturn (recession or depression, we shall see).  To me the reasons are:

- Inflation is very "sticky" in NZ and we're nowhere near winning this fight (as per article above).  So the painful choice ahead is even higher interest rates and a resulting deep recession like NZ hasn't seen in a long time, with mass business failures and redundancies or runaway inflation.  My guess is we will have a bit of both

- House values are dropping sharply, meaning billions of dollars being wiped out, owners being in negative equity, mortgagee sales, and an overall drying up of money flowing around.  Bank credit will be very difficult to obtain, this matters for businesses to function properly and keep people employed.  People will stop spending, plunging the economy into a deep recession.

- NZ's trade account is deeply negative, this hasn't mattered much until now, but that's about to change.  When other countries suffer too, we won't be able to keep spending more than we earn, NZ is effectively broke.  This means that, at a time when we need it most, the RBNZ won't be able to provide more financial support.  The NZD will plunge as a consequence, which will make inflation even worse in NZ… back to the first point made above.  A terrible feedback loop.

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Well said. The picture is getting bleaker every month and I don't really know what we can really do about it. 

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Great comment, sums things up well.

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I see the NZD/USD rate hitting 0.46 at some point in the future. We'll probably see further US dollar weakness in the short term, but beyond that I say "look out." Yes, I agree with Brent Johnson's "dollar milkshake" theory.

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Wow. We 100% agree. The root of our issues is a massive overshoot on leveraged debt tied to over valued property. 

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Great summary

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I cannot remember a comments thread, where pretty much all posts are in agreeance, such as this thread.  Frightening!

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Yvil, I also agree with your summary too. 

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in agreeance

With your extreme deep depression.?

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by HW2 | 16th Apr 23, 4:22pm - "With your extreme deep depression"?

Huh? I have never said I suffered from depression.

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I hope you dont suffer from depression

I was actually replying to Yvils post above. True that economic depression probably leads some to psychological depression. 

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In instances of economic depression, I think those who never saw it coming and were therefore unprepared are more likely to suffer psychological depression. It would be scary to loose control over ones own finances. 

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At greatest risk are those whose well-being and feelings are based on their wealth or lack of it.

If in a position, giving away cash to community groups can do wonders. We support several underpriveleged children in other countries. It doesn't cost much to make a difference, you should try it.

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the over 65s are living life to the max. Just look at who's in the cafe latte'ing up.

they've earned the right having worked hard, suffered at the hands of governments, failed finance company's, and stupid taxes/ rules

 

they where better educated, invested wisely in property,, weren't that well payed, and still never totally saw the Kiwisaver benefits....  But they got thier... No thanks to government interventions.

now take the latest generation/s ..

education is leftist socialist wokeness,. If you actually go to school;

they waste thier money on crap and ego gratification.

 

they are always "on the want '

love to be led by SM idiots

Love a useless cause to protest about...

want the government to make decisions for them

 

and ... Don't even know what sex they are!!!

 

 

 

 

 

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What a load of nonsense. This generational culture war stuff isn't going to get us anywhere. We are all in this together like it or not and focusing on these irrelevant issues is a waste of time.

Anti-woke people are often just as annoying as woke people in my view. Screaming at each other on the internet, never actually contributing anything constructive, two sides of the same coin. 

I don't even disagree with all you said here but you aren't approaching it in a constructive way. I agree, our education standards are dropping and we need to do something about that. I'm not sure what you're on about KiwiSaver benefits. But there is a way of framing these that isn't as negative as you have put them and it's unnecessarily divisive.

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So how is this related to the upcoming inflation announcements?

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Excellent satire in the style of "old man yells at cloud". Well done. 

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As good a thread as I've read all month. Well done all.

When you strip the cost of a roof over your head out of inflation reading to keep things 'appearing' as low inflation for many years, you cannot put them back in to help keep inflation 'appearing' lower when it goes up. If all the real costs of living were included, inflation would have higher for longer (over the last 20 years) up until 2 years ago, & therefore would be lower now. But neither is happening due to a political con in the late 90s, not just here, but across most of the western world. Sigh.

That would have exposed our non-tradeable inflation much earlier, as the real cost of both local & central governances has sky-rocketed over the past 20 years, but hidden amongst all the low (negative?) tradeable inflation (cheap Chinese imports). Sigh again.

This political con has contributed greatly to 'the deliberate fooling of ourselves' which many did not understand fully until recently. I could see it happening when they first stripped it out of the cpi but didn't fully comprehend the cost side until the late naughties, when I could plainly see the value for my taxes/rates was blatantly being abused by all parties, at all levels, at all times - both centrally & locally.

This is frustrating & this was frustrating & will continue to be frustrating until we reconfigure the real inflationary costs back into the public measures. This will require the politicians (& their enablers - the statists) to come clean & redo it, that's all. Triple sigh!

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Tough road ahead.

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To be honest our fiscal and economic response has been pro-inflationary as well. We've greatly increased government spending and added to pressure with resurgent immigration.

In a way RBNZ now has to fight everybody, not just consumers.

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What makes NZs situation worse than many others is the level of private debt to income borrowed to mainly buy houses.    I am not talking investment just private homes.      Once prices adjust down this debt will not disappear, unless it's defaulted on, and will act as a massive brake on future consumption.    It will also limit the ability to debt holders to save for retirement, effectively decreasing their individual consumption as retirees as well...   such is the devastation from collapsing bubbles.

 

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We've really blown it haven't we? We had a decade of low-interest rates that could have been invested into productive businesses and enterprises to set us up for the future, but instead, people got greedy and pursued the easiest possible path with little consideration for the long-term ramifications.

The government has its role in this to play as well as they could have directed capital in much more effective ways but they lacked the vision to set a better path and instead encouraged these damaging speculative behaviors through tax advantages and handouts. The time to fix all the problems we have now was 20 years ago. Instead, we will have to make do with the cards we've been dealt, and we've got a pretty poor set of cards.

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I see a lot of references to the politicians but I don’t think any you really appreciate how the business lobby groups have acted in a corrupt way to allow all of this.

Some very tough questions have to be asked of how and why this has been allowed to happen….who asks them god only knows.

And I can assure you if NZ doesn’t get to the bottom of it then the country will be so ripped off by key and luxon when the banks need bailing out.

And here we are.

The national party needs a coup from within to save it. Their current plan is so pathetic when one realises what issues the country faces.

Also our legal system is now so ineffectual and allows too much corruption sadly. Look at Jenny Shipley and Mainzeal….how many years for a decision? I could add a few more but I digress. The commerce commission gets an easy ride and everything is sugar coated for public consumption.

Still good news for people who have saved some dough, invested in productive business and diversified out of NZ…..but sadly that’s not many kiwis.

Time for a royal commission into the whole sordid affair around housing.

 

 

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You reference National, however labour have been in power with a majority for some time. Yes JK was involved in this prior to resigning but the current issues are firmly labours fault. For instance removing LVRs and pressuring the RB to drop interest rates during COVID. Also locking the country down on multiple occasions and paying people not to work. On that, they are still paying for staff on Covid leave….what a rort! Don’t get me started on addition comms staff, destroying the health department and focusing on diversity as the economy craters.

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I would struggle to pin the blame solely on either of the parties. It seems like the place we are now is the result of decades of mismanagement rather than the direct result of recent government decisions. Short-term thinking has dominated discourse for the last couple of decades and we are now reaping what we have sown there in regard to the results.

Neither of them offers anything substantive that will get us out of this mess and stop it from happening again. We need proper leadership and our political class seems to be failing us on both sides of the aisle for the time being.

Hopefully, some better policy comes out closer to the election but for now, I remain pretty unimpressed.

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E46 you cannot assume that banks would have lent money to risky new business ideas as they did for houses, well unless you could secure it against... housing...       Banks have been incentivised to lend to housing by a lower cost of funds ratio, but also easier to get back funds as a house is a house and land is land.       Banks will never lend ma and pap 600k to play around with gene splicing.

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This is true, but I still think we have put a disproportionate amount into real estate than other avenues, especially in regard to government policy which I feel should have been trying harder to invest in productive businesses rather than encouraging speculation. Countries like Finland, Israel, United States all have invested heavily in R&D and similar and it pays dividends down the line. But we are so risk-averse we don't seem to encourage anything except housing speculation.

Stuff like the FHB grant which gave some homeowners something like $10k just ends up being distortionary to the market rather than actually useful. Then you have policies like the accommodation supplement which has basically done nothing but raise the rent floor for everyone, practically subsidizing landlords artificially. Not even getting started on how much more tax-efficient housing is as compared to other investments previously. This has been changed somewhat but they seem to have done it in a pretty clumsy way. 

I've said before that I don't know what the exact answer is, but it's pretty clear that how we have been doing things is clearly not working and something substantial has to change otherwise we are just going to get poorer and poorer. 

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Many Ma and Pa couples bought their one and only rental for a reitirement plan, to produce the weekly rent once paid off in 20 years.....       If NZ had a super system like aussie they would have been confident of income and we would not have got a bubble this size, aussies bubble is way smaller by about 35%.....

I would vote tomorrow for any party who makes super compulsory for all those turning 18, labour understand sit did it for ciggies just not super.... 

I don't understand why Labour don't do this its great social policy.... the left continue to amaze me that they don't grab the low hanging fruit but fritter money on co-governance and seperate health authorities......

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My view is that house rentals work when the returns are based on fundamentals, but it seems like the majority of investors haven't been chasing rental returns, they have been chasing after untaxed capital gains which is where it's become unsustainable and damaging.
The market would be in a much better place if it was just people seeking modest rental returns on the property to help support their retirements but I don't think that is what we have ended up with. The low-interest rates acted like a lolly scramble and every man and his dog with money to burn jumped in, driving prices up, pricing out FHB's and making everything ultimately more expensive for everybody, and placing us in the incredibly uncomfortable position we are in now.

I imagine it becomes a bit of a hot potato when you tell all the young people who haven't had a chance to vote yet that they are going to be paying higher percentages into their KiwiSaver whilst still paying for the older generations' generous universal superannuation scheme. 

From what I have read (and correct me if I am wrong here) how New Zealand's superannuation scheme was initially set up was pretty good and would have been worth hundreds of billions by now.
But that was voted to be scrapped by Muldoon and we have got what we've got now. If that had been around we would probably have much healthier and balanced capital markets than we have ended up with but the voters back then decided they didn't want a forward-thinking policy they chose to go with a pay-as-you-go scheme which is not going to be sustainable into the long term and has starved our capital markets compared to countries that have stronger systems in place (e.g USA, Australia, Norway, etc.)

I agree that Labour has completely dropped the ball, they had the opportunity to do pretty much anything and then they instead have wasted all of their political capital on stupid stuff like what you have mentioned above and spent billions upon billions of dollars with absolutely nothing to show for it.  Absolute shambles of a government.

 

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I remember the Govt telling Ma & Pa over a decade ago that they needed to plan to provide for their own retirement future.

I can't remember whether it was Clark or Key...?

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KiwiSaver...?

The worst thing to happen to KiwiSaver was National raiding it to raise the amount that younger generations could pay for houses.

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"We had a decade of low-interest rates that could have been invested into productive businesses" - great in theory , but never happens.  Persistent , artificially low interest rates inevitably lead to asset bubbles , just as night follows day . 

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A quick look at googles 'trending searches' tells me most folk are living in another realm...lol

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Ya think inflation is going to ease next quarter?  Minimum wage went up 7% and the Living Wage went up 10% on April 1st, along with similar increases for everyone on benefits. 

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Isn't this a good thing? Genuine question for those that are more economically savvy. 

How likely is it that people on living wage and minimum wage are indulging in a huge amount of discretionary spending? Will the additional money not just be going on keeping up with essentials like food and energy?

Will it not mean that it will be the people that are not on minimum wage who will feel the bite and have to cut down on discretionary spending?

So overall increasing minimum wage just provides a level of protection for the most vulnerable as inflation tears away from us and means that the onus on reducing spending to tame inflation will fall on those that have more  discretionary spending?

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Who do you think pays for those wage increases?  Businesses will have to put up their prices in order to be able to afford to pay those increases.  Cash doesnt just appear like magic in the private sector, the way it does in the public sector.  Plus the benefit bludgers will be out there blowing their extra money on cigarettes, drugs, pokies, alcohol, and gambling just like they have always done.  While still not paying their rent because they know it will take months for the landlord to get an eviction order, during which time they live rent free before being moved on to the next gullible landlord or accommodated by the Govt at taxpayer expense. 

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The supermarkets are still pumping prices rises on a weekly basis

Food price index out today will give a bit of a indication on CPI

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