Okay, so here's where we find out if those massive interest rate hikes are starting to 'do the trick' on inflation - and are therefore worth the pain being inflicted, particularly on mortgage holders.
We really have to hope the rates hikes are 'doing the trick'. After all, tackling the inflation beastie is what the high-speed ascent of the Official Cash Rate from just 0.25% at the start of October 2021 to 5.50% now is all about. This is what the Reserve Bank's engineering of a recession and pending job losses is all about. The RBNZ wants the inflation beast slayed. And asap.
The latest instalment of the inflation battle will be played out when Stats NZ releases the June quarter Consumers Price Index reading of inflation on Wednesday (July 19).
For the March quarter, annual inflation was at 6.7%, and that was down from 7.2% in the December 2022 quarter - remembering that the peak, and a 32-year high was, 7.3% as at the June 2022 quarter.
So, the big question is will inflation continue to fall as of the June quarter this year? Well, it should do, and maybe by quite a meaningful amount. The RBNZ is forecasting an annual rate of 6.1%, down from that 6.7% previously.
At time of writing I had three of the major bank economists’ picks in front of me and ANZ, ASB and Westpac are all picking 5.9% for the 'headline' inflation figure.
If they are right, it would be the first time since December 2021 (when the annual figure was 5.9%) that inflation has gone under 6%.
Now those of you who are fairly fresh from reading about how food price inflation has surged back up again to a 30-odd-year high of 12.5% might wonder how it could be that 'inflation' is apparently coming down? Well remember, while food price rises are something we acutely notice, they actually make up less than a fifth of the composition of the Consumers Price Index.
There are many other component parts.
The key thing to look out for in the figures in the coming week will be the breakdown between the so-called 'tradable' inflation and the 'non-tradable' inflation. In basic terms the tradable inflation refers to 'imported' inflation - such as through imports of oil products - while 'non-tradable' inflation refers to domestically generated inflation, such as building costs.
It is the domestically generated inflation that the RBNZ can directly influence through its interest rate hikes - so, the domestically generated inflation is the data we should be scrutinising most closely.
In this regard it is well worth pointing out that for the March quarter 2023 the reasonably substantial fall we saw in annual inflation to 6.7% from 7.2% was entirely due to sharp falls in overseas-generated inflation. The tradable inflation figure fell from a stratospheric 8.2% as of the December 2022 quarter to 6.4%.
Meanwhile, however, the non-tradable, domestically generated, inflation actually ROSE to a new high of 6.8% up from 6.6% in the December 2022 quarter.
It goes without saying that we need to see the domestic inflation figure falling before we can start feeling confident that the RBNZ's measures to date really are working.
So, what's expected for the coming week's figures? Well, the RBNZ is forecasting that the tradable inflation figure will continue to drop - down to 5.8% from 6.4%. And it's also forecasting the domestic inflation figure will drop too - to 6.3% - from that peak 6.8% figure.
ANZ senior economist Miles Workman and economist Henry Russell say there’s some "low-hanging fruit on the tradables side of the ledger".
They point to ongoing global goods disinflation reflecting slowing momentum in China, fading supply-chain disruption, a much lower oil price than a year ago, and a "dramatic" normalisation of shipping costs.
In terms of non-tradable inflation, the ANZ economists expect reduced construction cost pressures to be knocking nearly 0.6 percentage points off annual non-tradable inflation.
So, inflation is reducing.
But whatever happens in the June 2023 quarter we will now have had inflation outside (and mostly WELL outside) the 1% to 3% official target range for two years.
That's significant, because it's long enough now for the dreaded 'inflation expectations' to start getting entrenched - for people's behaviour and future wage pricing expectations to incorporate high inflation, and therefore actually lead to ongoing price rises.
This is why the RBNZ has been in such a tearing hurry with its rate hikes. That's why the RBNZ was prepared to put us into a recession. Because it is trying to knock over actual inflation before those inflation expectations are just as ingrained as they were in the 1970s and 1980s. Ongoing inflation would be a killer for our economy.
Assuming we do see a reasonable fall in annual inflation for the latest quarter, can we expect this to be a continuing trend? Well, the RBNZ thinks so. It is forecasting for annual inflation to be down to 4.9% by the December quarter and then to get back into the 1% to 3% target range as of the September 2024 quarter.
Nice if it happens, but I'm still not so sure it will all be quite so smooth.
We do need to see at least some magnitude of fall in the domestic inflation in the new figures in the coming week to feel reassured that we are truly heading in the right direction.
The RBNZ is forecasting non-tradable inflation to fall to 5.2% by the end of this year and 3.5% by the end of next year. So, this domestically generated inflation is being seen as likely to be much more 'sticky' than the overseas sourced inflation, which the RBNZ is forecasting will be down to 4.8% by the end of this year and just 1.0% by the end of 2024.
How 'sticky' this domestic inflation may prove to be is the key factor.
Is there any chance at all of 'nasty surprises' in the latest inflation figures?
Well, if there is to be a spanner in the works, then I would suggest this would mostly likely be if the non-tradable inflation figure comes in higher than expected. That could knock confidence and shake things up a little.
My best guess would be that for now anyway we are likely to see all the inflation figures tracking in the right direction, IE down.
But I'm still not convinced that the path downward for inflation next year is going to be as smooth as the RBNZ sees it yet. Remember, we have had two years of elevated inflation now and that's been long enough for us to pick up some 'bad habits' in terms of future pricing behaviour prompted by inflationary expectations.
That will be something to be considered next year though.
What about mortgage rates then? Any relief to be expected if inflation does fall as expected in the June quarter and for the rest of this year?
Well, in its latest OCR review this week the RBNZ expressed quiet confidence that it is now getting the measure of inflation.
But it also referred to "interest rates remaining at a restrictive level for some time". So, in other words, we should NOT expect interest rate falls till the RBNZ is wholly confident it has slayed the inflation beast.
Fingers crossed, the coming week's figures should be a good step in the right direction. But they will be just one step.
In the meantime, mortgage rates will remain elevated, spending is likely to be stifled, and the economy will keep slowing.
If we can truly beat inflation, it will probably feel worthwhile.
But we haven't beaten it yet.
Consumer prices index
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