Business leaders and professional forecasters' short and medium term expectations for inflation, as measured by the consumers price index (CPI), have moved higher, according to a Reserve Bank survey.
The RBNZ’s Survey of Expectations, released on Wednesday, canvasses the views of business leaders and professional forecasters. Field work for the survey was done between April 22 and April 29.
The survey found expectations for one-year-ahead annual CPI inflation jumped 82 basis points from 2.59% to 3.41%.
Two-year-ahead inflation expectations also increased by 16 basis points - going from 2.37% to 2.53%.
ASB senior economist Mark Smith said given CPI inflation has been at or above 3% for close to a year and with well publicised cost hikes on the horizon, it's not surprising to see short-term inflation expectations increase.
“What would have been more encouraging from the RBNZ’s point of view would have been the pullback in longer-term inflation expectations,” Smith said, as expectations for five and ten-year horizons have moved closer to 2%.
Annual inflation remained at 3.1% in the March quarter, for the second consecutive quarter, and continues to be a touch above the Reserve Bank’s (RBNZ) 1% to 3% target range. The RBNZ has a midpoint target of 2%.
Smith said the increase in the two-year-ahead expectation was in line with ASB’s expectations.
“This suggests participants are acknowledging some risk of high near-term inflation proving to be more persistent.”
The report found five-year-ahead inflation expectations decreased by 9 basis points, from 2.31% to 2.22%, and 10-year-ahead inflation expectations dropped 11 basis points from 2.30% to 2.19%.
“The RBNZ will want to verify these results with those from forthcoming household and business surveys and with other pricing side metrics to see if a common pattern emerges," Smith said.
As the country is experiencing a slower than expected economic recovery and the RBNZ previously saying ongoing conflict in the Middle East has materially altered the outlook and balance of risks for inflation and economic growth, the results of this survey may not be a major surprise.
But people’s expectations of inflation are important - if people think inflation will rise, they may change their behaviour and businesses could potentially start to incorporate higher inflation into their prices, by raising them, and this in turn will produce higher inflation.
House price inflation
The survey found respondents’ expectations of house price inflation over the next two years have weakened.
“The mean one-year-ahead expectation for annual house price inflation decreased by 2.04 percentage points from 2.37% last quarter to 0.33%.
“The mean two-year-ahead expectation for annual house price inflation was 2.80%, a decrease of 64 basis points from 3.44% last quarter.”
Smith suggested this will "cause few sleepless nights at the RBNZ".
Smith said Official Cash Rate (OCR) hikes are a matter of when and not if.
Several bank economists have brought forward their OCR hike projections - with many picking July but not ruling out the possibility of an increase in May. The OCR is currently at 2.25%.
The survey found the mean expectation from respondents was for the OCR at the end of the June quarter to jump 9 basis points to 2.34% and the mean one-year-ahead OCR expectation saw a jump of 43 basis points - going from 3.01% from last quarter’s estimate of 2.58%.
Smith said: “If evidence points to a generalised and persistent uplift in inflation emerging, more proactive monetary normalisation is warranted, particularly with a troublesome short-term inflation outlook and with the 2.25% OCR below circa 3.25% neutral levels.”
“If not, the RBNZ will probably wait but they run the risk of having to undertake a more protracted tightening cycle if they fall behind the curve.”
Unemployment rate and wage growth expectations
The survey found that unemployment rate expectations had increased across both time horizons - with the mean one-year-ahead unemployment rate expectation increasing 42 basis points from 4.95% to 5.37% while the mean two-year-ahead unemployment rate expectation went up 39 basis points - from 4.58% to 4.97%.
As for wage growth, expectations have increased.
The survey found the mean one-year ahead expectation for annual wage inflation was 2.63% - a jump of 11 basis points from 2.52% last quarter, and the mean two-year-ahead expectation for annual wage inflation jumped 10 basis points, going from last quarter’s estimate of 2.74% to 2.84%.
GDP
The survey found expectations for one-year-ahead and two-year-ahead gross domestic product (GDP) growth have decreased.
“The mean one-year-ahead expectation for real production-based GDP growth decreased by 45 basis points from 2.03% last quarter to 1.58%.
“The mean two-year-ahead expectation for real production-based GDP growth decreased by 14 basis points from 2.30% last quarter to 2.16%.”
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.