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Inflation expected to come close to hitting the Reserve Bank's sweet spot, enabling it to take a breather before possibly cutting interest rates again

Inflation expected to come close to hitting the Reserve Bank's sweet spot, enabling it to take a breather before possibly cutting interest rates again

Economists expect Statistics New Zealand data out on Friday to show inflation came close to hitting the Reserve Bank’s (RBNZ) sweet spot in the December quarter.

Kiwibank economists expect annual inflation to come in at 1.7%, ASB and Westpac economists expect 1.8%, and ANZ economists forecast 1.9%.

The RBNZ is tasked with using the Official Cash Rate (OCR) to keep inflation between a target range of between 1% and 3%. It cut interest rates by 75 basis points last year to make it cheaper to borrow money to encourage more spending and thus price rises.  

With annual Consumer Price Index (CPI) growth expected to have jumped in the December quarter, from 1.5% in the September quarter, there’s growing consensus the RBNZ can take a breather before possibly cutting the OCR again.

Furthermore, the 0.3% to 0.5% quarterly CPI growth economists are forecasting is stronger than the 0.2% (1.6% year-on-year) forecast by the RBNZ in November.

ANZ senior economist, Miles Workman, said this difference is mostly owing to stronger-than-expected tradable inflation - goods and services in competition with foreign goods, so don’t show how domestic demand and supply conditions are affecting prices. This is a less persistent measure of inflation.

“Taken together with some recent improvement in the data pulse, this suggests the RBNZ can afford to be patient with monetary policy settings – unless something untoward happens,” Workman said.

He said there was a little more “pent up inflation pressure” than previously thought.

Revisions to third quarter gross domestic product (GDP) figures show the economy was running a little hotter in late 2018 and early 2019 than previously thought.

“However, the sharper deceleration in growth in the second half of last year suggests pipeline inflation pressures may struggle to intensify from here,” Workman said.

“Signalled downward revisions to annual net migration inflows suggest labour supply (and potential GDP) may have been a little lower than previously assumed, implying higher-than-otherwise pipeline wage and inflation pressure for a given rate of economic expansion.

“Looking forward, the recent recovery in the housing market and business sentiment (but less so reported business activity), and the promise of a little extra government spending on key infrastructure - even if that is a slow burn, medium-term story - mean the balance of risks to our forecast of an OCR cut in May is skewed towards this happening later, if at all.

“Admittedly, the recent improvement is off a pretty soft base and may not persist, but for now the RBNZ should be feeling pretty comfortable that previous easing in monetary policy is working its magic - albeit perhaps gradually.”

Forecasting weaker inflation growth than ANZ, Kiwibank economists, Jarrod Kerr and Jeremy Couchman, maintained inflation is “certainly not guaranteed to settle around 2% over the medium terms”.

“As we saw in last week’s business confidence survey, there remains hesitancy and caution among firms,” they said.

The New Zealand Institute of Economic Research’s December Quarterly Survey of Business Opinion showed a net 26% of businesses surveyed were downbeat on the economy, compared to a net 35% in the September quarter.

Meanwhile a net 11% of firms had a negative view of their own trading activity - the same portion as in the previous quarter.

Taking a view in between that of Kerr and Couchman and Workman, ASB senior economist, Mark Smith, said: “Despite the overall pick-up, we don’t expect Q4 to reveal an inflationary smoking gun…

“We have pencilled in a 25bp cut for 2019, but acknowledge that the odds of the OCR moving lower have subsided in recent months.”

Jumps in transport and housing costs are widely expected to have made the largest contributions to CPI growth.

Kerr and Couchman summarised: “Transport prices are likely to make the largest contribution to inflation (1.1%qoq or 0.2%pts). On top of the usual holiday surge in transport prices, from the likes of higher airfares, petrol prices were 3-5% higher over Q4.

“In addition, the December quarter was the first in which the airline Jetstar had pulled out of regional markets. And less competition usually means higher prices.

“Housing-related prices were probably not far behind transport as a contributor to inflation in the final quarter of 2019. Significant demand for housing has seen a persistent rise in both rents and construction related prices – fuelling non-tradables inflation.

“Food prices will work in the opposite direction, due largely to seasonally cheaper fresh produce prices. However, the 0.6%qoq fall in food prices will be the smallest Q4 decline of the last decade.”

Consumer prices index

Select chart tabs »

The 'CPI % year on year' chart will be drawn here.
The 'Tradable inflation % pa' chart will be drawn here.
The 'Non-tradable inflation % pa' chart will be drawn here.
The ' Food prices % pa' chart will be drawn here.

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Inflation is bloody scary. Almost as scary as deflation. It’ll show its face one day, and when interest rates rise as a result some not so good things will happen. No time soon though.

Hopefully it will come with some nice pay rises though.

interest rate rises are years and years away, we along with many countries will not be able to service a 6-7% interest rate, it would tip not just this country but many countries into deep recessions.
the growth of the last ten years has been built on debt creation which has in turn been misdirected to asset appreciation.
assets of all nature are over valued but that is where most of the money is going
hence interest rates have gone down to service the ever growing pile of world debt and will be kept there as long as possible by all central banks.
quantitative easing is the new normal now

Furthermore, the 0.3% to 0.5% quarterly CPI growth economists are forecasting is stronger than the 0.2% (1.6% year-on-year) forecast by the RBNZ in November.

That would make real 10 year NZ government bond yields negative - hardly a precursor of growth

I wrote a piece in early 2015, saying that in my opinion, inflation would stay lower for longer than many believed. I believed then and now that this was a structural rather than a cyclical phenomenon. I pointed to graphs of long-term inflation from several countries including the UK, US Australia and NZ, showing that inflation had peaked in all these decades ago.

In NZ now, there is a wide gap between tradable and non-tradable inflation rates and I expect this to persist. However, there was an interesting piece in Newsroom very recently on the potential for technology to bear down on some aspects of our non-tradable inflation. " Thus, looking at streaming services it said this; "What was once a 'non-tadable' indud=stry with solid profit margins has quickly become part of the 'tradable' sector with falling prices and massive disruption. This is also proving very difficult for the Reserve Bank, which is seeing technological disruption driving down prices suppressing inflation in parts of the economy that were once inflation generators".
Of course, any overview of inflation must acknowledge that while it has been largely suppressed in terms of consumer price inflation, it has been rampant in asset price inflation and this was shown to be an inevitable part of the financial system by the American economist Hyman Minsky.

Make no mistake, theres plenty of inflation out there. Every non tradeable service I consume has increased by at least 10% over the past year. I think the 'basket' of surveyed costs needs to be reviewed because I'm just not seeing a low inflation environment in my day to day activities. Anyone seen the price of a pint of Heineken low alc lately? Its criminal, I think it would be cheaper drinking full stength and getting DIC'd!

Its the same as the new vegan craze at resturants. You pay extra for no meat, cheese or butter in your dinner. Clever marketing by selling lower cost goods for a premium price

Yeah I got tucked into bed recently too... I payed $22 for a macrobiotic dish that turned out to be a slurry of beetroot cubes and barely softened brown lentils. I told the matriedee he was a criminal and took the remainder of the meal home to use as hardfill on my commercial development, it packed down so well I am tempted to make up my own from now on...

100% agree. We have been on a reduced income for the last few years and up until about late 2018 we were managing quite well. Now it’s starting to bite. Thankfully we will be back up to normal income soon. Australia is starting to appeal. I noticed on a recent trip how much cheaper it is...quite blown away by it in fact. Our costs have increased by 8-10% p/a for sure even the theme parks in Aussie seemed cheap to here.

Yep food seemed way cheaper, certainly Petrol at $1.30-$1.48 depending on grade was WAY CHEAPER than when we got back to NZ !

Thanks Labour for the no new tax.

Australia has a different way of gathering its roading revenue so comparing price of fuel quite doesnt pan out. I often look at things like a 40kg bag of cement or the price of a new set of car tires for instsnce when I visit other countries, then you see just how expensive it is for everything here in NZ. But thats neoliberalism for don't charge an ethical price, you charge what the market will bear and who cares if that makes your client too poor to buy off you next time round...I'm looking at you Progressive Foods....

And of course higher fuel and housing costs (read, rents) bear most heavily on those least able to cope....chalk up another run for the Concerned Coalition....more fodder for the Victim Creation and Alleviation industries....

There is a scenario that we are setting the preconditions for "stagflation", where both cutting and increasing OCR will be counter productive.

Wow, who would have thought adding 16% petrol tax would affect inflation and adding an extra 56k+ people!

Oh silly me actually everyone thought that apart from the Govt who then paid for an investigation into why Petrol had gone up.

Political ploy which half of the population accepts

I think they paid for an investigation into why petrol was so much cheaper near a gull station. Turns out it is because the other companies are ripping us off.
Increases in fuel tax don’t necessarily increase inflation- as it is a fixed dollar amount it has to be increased every year just to keep up with inflation. Obviously 16% is more than inflation but wasn’t that a long time ago now (and only in Auckland)? Either way someone has to pay for new roads and it makes sense for the people who use them the most to pay.

Gulls fuel is very low quality and in my experience I get lower kms out of it due to the ethanol and other components they blend into their fuel. The best way to get cheap fuel for me has been to go high tec and use the gaspy app which gives my price transparency on all the gas stations in town. I then can buy higher quality fuel from one of the majors if they are doing specials, which they often are.

Well it would be foolhardy for the RBNZ to take comfort in slight oil price increases to give inflation a push .

The reality is that every other commodity and manufactured good is seeing zero increase in NZ

Arguably many stats are going backwards given the effect imported inflation should be having. Seems it's barely keeping us above the line.