Economists are now seeing 'downside risks' to their December quarter inflation forecasts after new pricing information released by Stats NZ showed some prices actually dropping - and by more than expected.
Stats NZ's new monthly Selected Price Indexes (SPI), which make up around 45% of the Consumers Price Index (CPI), New Zealand's recognised measure of inflation, showed an actual fall in food prices for October, while airfares dropped sharply and by rather more than expected.
The new data absolutely locks in the fact that the Reserve Bank will leave the Official Cash Rate unchanged at 5.5% when it has its last review for the year on November 29. But it also points to increased likelihood that 5.5% will definitely be the peak of this interest rate cycle.
Currently wholesale interest rates are pricing in an 80% chance that the first cut to the OCR will occur by August of next year.
Two sets of major bank economists - those at ANZ and Westpac - have been forecasting a further rise to the OCR at the first review of 2024 in late February. But this latest information is casting doubts.
Westpac senior economist Satish Ranchhod, in a review of the new Stats NZ data, said the faster decline in headline inflation will help reduce risks to inflation expectations "and so likely increases the hurdle the RBNZ needs to get over between now and then".
"We’ll be watching how domestic demand and the labour market are evolving to determine the longer-term outlook for the cash rate."
ANZ economist Henry Russell and chief economist Sharon Zollner said given softer-than-expected data they have revised their fourth quarter headline inflation forecast down from 0.9% to 0.6%.
They have also revised their non-tradables (domestically sourced) inflation forecast lower from 1.1% q/q to 0.9% q/q.
"We still expect Q4 non-tradables inflation to come out higher than the RBNZ August forecast of 0.8% q/q.
"However, the expected miss is now much smaller, and is looking less likely to be a smoking gun for a hike as soon as February.
"We continue to believe that non-tradable inflation will not dissipate as quickly as the RBNZ is forecasting. But recent helpful starting point surprises on inflation and the labour market make it more plausible that the job can be done with an OCR of 5.50%."
BNZ senior economist Doug Steel said the BNZ economists are not revising down their fourth quarter inflation forecast at the moment, pending further analysis, "but it is fair to say it has been put on notice" by the new Stats NZ information.
"We note that the RBNZ’s prior (August MPS) CPI forecast had annual inflation at 5.2% in Q4. This was prior to Q3 CPI printing below the Bank’s expectations. [The RBNZ expected 6.0% and the actual annual rate was 5.6%].
The new Stats NZ data suggested that annual CPI inflation in Q4 "is at risk of pushing further below the [RBNZ's] prior forecasts," Steel said.
"All of this supports our view that the RBNZ is done with its hiking cycle. Of course, monetary policy is about much more than just the next quarter’s CPI. But the potential starting point and near-term direction for inflation is important to consider."
At the moment BNZ economists are forecasting 0.7% inflation for the current quarter and an annual rate of 4.9%.
After the new Stats NZ data, Westpac economists have revised their December quarter forecast for inflation to 0.6% form 0.9% previously, Ranchhod said.
"For the year to December, we now forecast a rise in prices of 4.8% (previously, we expected a rise of 5.1%)."
60 Comments
We're all working with a common inflation index.
Another is the deflation of the value of time, vs return. You fail at that worse than someone living in the fiat world and using half the time you spend being a Bitcoin wizard, pushing trolleys around a carpark.
Baaaaaaa!
We're all working with a common inflation index.
The CPI is nothing but a construct. This is also what my normie mates struggle to understand. They seem to believe that if the CPI is 5%, it has to be a fairly good approximator of the reality for individials, h'holds, and broader society. When it is suggested that the CPI is more likely understated from reality, you will be labelled a conspiracy theorist.
Overnight in the U.S. data, according the government CPI magicians, health insurance went down by 34% last month. Go figure.
A common point of reference that wasn't manipulated to present a better-than-reality picture would be more helpful. Spend an afternoon looking at the basket-of-goods spreadsheet used to calculate CPI. It becomes pretty clear that this is an exercise in obfuscation. The publishers want to be able to claim transparency, while hiding manipulation in a mess of figures.
Councils are increasing rates by 10-20%. I suspect "real" inflation sits somewhere in the middle of this range, allowing for some "catch-up" spending on infrastructure.
Well said.
Reminds me of the Enron saga. The people who were right about Enron were all posting on internet forums. Methinks banks and brokers were lying so they could get out before the sticky brown stuff hit the whirly thing. Ditto the GFC, by the way. Banks, brokers, etc. have taken "plausible deniability" to such an extreme it is no longer remotely plausible.
I rate being within a 3 month window as being 'spot on'.
I'm usually around 6 months too early. Perhaps not this time? We'll know after Christmas, around Feb / March when I expect some lovin' words from the RBNZ. Jfoe is picking May if memory serves. That all feels about right.
Far from it.
But I seem to remember you trying to diagnose others on here with personality disorders (using fairly incomplete understanding).
The very notion of trying to front run discussion by self promotion of "independent observer" is perilous.
You're obviously a thoughtful and inquisitive person. Just perhaps a little blind to your own hubris.
Misrepresentation Iceman. These are not my views. Rates will come down if the economy tanks (and that is a possibility - actually a likelihood of you look at yield curves)- but that isn’t good news for your property interests because it means businesses will be failing, people will be losing jobs and incomes will be falling.
But if it makes your ego feel good to think you’ve got one over your mental/online enemy’s on this forum you call muppets - good for you.
If it eases your mental suffering please fire more inaccurate misrepresentation and insults in my direction. And when your ego is satisfied then you can stop.
Any other small minded words like muppet you would like to fire in my direction?
Higher than 0%…yes!
Anything above 0% could be viewed as HFL - but then again it’s a silly comparison to make so I don’t know why you have dragged me into your original post (other than that you dislike my comments because I’m not bullish on property and that is a threat to your own vested interest).
re ... "Rates will come down if the economy tanks ... "
No. Rates will come down if inflation comes down. That is the RBNZ's remit.
High interest rates - see Jfoe's posts - cost NZ Inc dearly. Why? Because so much is hoovered up by the Aussie banks and get sent overseas. The RBNZ does NOT want that.
1) They are not wrong yet, although it is looking more likely
2) Plenty of opinions have been wrong, anyone who can reliably predict the future would be silly to share it on these forums
3) If you do predict something right, its probably just a fluke. I predicted a soft landing before many here did, but I could have been completely wrong, and I may still be so. At the moment it is looking like a soft landing for most countries but I am not so sure about NZ.
The headline is misleading again, David.
It should read, "Bank Economists are reviewing their inflation and interest rate forecasts after ..." ... Or maybe Aussie Bank economists?
The fact that bank economists were, and still are, predicting further OCR increases comes as no surprise to this non-bank economist.
ComCom need to analyse how often the utterances of these bank economists are repeated and compare them to the same from non-bank economists. I think we'll find bank economists infomercials carry far, far too much weight while they lack the disclaimer that they come from sources that have vested interest in customer perceptions.
As an side, hat's off to Kiwibank economists who appear at this time to have got it just about spot on.
I am no longer surprised that vested interests are no longer identified or held up as such yet should be
The problem is that its getting harder to get real information that doesnt come from a vested interest group. Our civil service, universities, UN, even Greenpeace are now all often operating and providing information that suits their narrative.
Its one reason for being here - neutral and/or informed narratives
Try not having a vested interest position and see how you get gaslit and attacked by those who do have a vested interest.
It appears we’ve created a society where you have to pick sides - hence why we are all attacking one another and the social division we are seeing.
We need some unifying actions/behaviours to bring us back together.
Is inflation back to 2% yet? No? Then don't bet on rate cuts. Even the US is having problems with getting inflation to come down below 4% let alone back to 2%. Inflation is sticky. And if 5.5% rates can't get inflation below 4% then they certainly aren't going to be cutting the rates below 4% either. Otherwise we repeat the 1970's when inflation got down to 3%, they cut rates, then inflation took off again to 14%.
If we wanted to get inflation rates lower faster then interest rates would need to be much higher but obviously the housing market will not take it with pretty everyone on 1 and 2 year rollovers not 30 year fixed rates like the USA. The system in NZ leads to instability and wild fluctuations.
"Stats NZ's new monthly Selected Price Indexes (SPI), which make up around 45% of the Consumers Price Index (CPI), New Zealand's recognised measure of inflation, showed an actual fall in food prices for October, while airfares dropped sharply and by rather more than expected."
So the other 55% is hunky dory
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