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Economists see inflation possibly dropping below the minimum target of 1% this year, but say it's going to be difficult to even accurately measure it after the disruption of the lockdown

Economists see inflation possibly dropping below the minimum target of 1% this year, but say it's going to be difficult to even accurately measure it after the disruption of the lockdown

Inflation, as measured by the Consumers Price Index (CPI), is heading down.

But like so many things at the moment by how much is open to many questions.

And economists even question how well and how easily the rate of inflation will be measured this year in an economy severely disrupted by the lockdown.

Inflation figures for the March quarter are set to be released by Statistics New Zealand on Monday (April 20).

As per recent economic data the figures will show an economy that was pretty much on track - till the Covid-19 virus knocked it all for six.

Economists see the March quarter inflation figure coming in at around 0.4%-0.5%, giving an annual rate of inflation of 2.1% to 2.2%. That's pretty much in the sweet spot of the Reserve Bank's targeted 1% to 3% range.

But such a stunningly normal figure is set to give way to things that are anything but normal in subsequent quarters.

"What inflation did in Q1 is hardly relevant for monetary policy settings today," ANZ senior economist Miles Workman says.

"The [Reserve Bank] (RBNZ) has already thrown the kitchen sink at it. But even with fiscal support in train, we think it’ll need to add the bathroom vanity as well."

He says looking forward, there are a number of categories of price that might be difficult to measure while the country is under lockdown.

"We are experiencing such difficulties with our Monthly Inflation Gauge, and suspect Statistics NZ may need to make some interpolations during this time. However, the dust will settle and a measured price level will eventually be observed. And when that happens, we’re expecting to see a very weak underlying inflation pulse emerge."

BNZ senior economist Doug Steel says annual CPI inflation is expected to fall below the RBNZ’s 1%-3% target band "and perhaps materially so".

Indeed, he sees a risk of deflation.

"The macroeconomic outlook demands we don’t take the risk of deflation lightly," he says.

"The unemployment rate is set to skyrocket, generating downward pressure on wage inflation and, by association, price inflation. There are already widespread stories of wage cuts appearing, even if many are time-limited for now and connected to the lockdown. More broadly, GDP slumping well below potential, with lower employment and weak disposable income is a recipe for weak inflation ahead. Any upward price pressure from a higher minimum wage will be swamped by broader weakness."

Steel says current BNZ forecasts see inflation "tracking below 1%" after the first quarter.

ASB senior economist Mark Smith is expecting core inflation to move into a "1%-1.5% zone" after the first quarter.

"Our forecasts assume that recovering economic activity will trigger a turnaround in inflation outturns from 2022, with annual CPI inflation outturns set to lift thereafter."

But he says there is considerable uncertainty around the economic and inflationary outlook.

"Risks to our inflation outlook are tilted to the downside, particularly if the economic downturn and associated deflationary impulse from COVID-19 turns out to be deeper and more protracted than what we assume.

"The RBNZ will be keen to prevent annual inflation outcomes from easing too far, running the risks of the NZ economy entering a deflationary spiral and blunting the effectiveness of the record low [Official Cash Rate of 0.25%] – it is real interest rates that matter after all.

"If the inflation outlook deteriorates further, we expect the RBNZ and the NZ Government to further step up policy stimulus measures. Let’s hope we don’t have to go there. We expect the OCR will not move above operational lows (currently 0.25%) until 2024. If it was technically feasible to do so and it did not harm the financial system, the OCR could potentially move lower still."

ANZ's Workman expects annual inflation to slow to just 1% by the end of the year and remain below this level for all of 2021, with only a gradual recovery thereafter.

"Risks to this outlook are skewed to the downside. With this outlook in mind, the Q1 CPI data certainly feels a lot less relevant than usual. We think fiscal and monetary has a lot more work to do. Once Covid-19 risks are under control it will be time for fiscal policy to kick-start the economy. Consistent with a weaker economic outlook and the expected path of bond issuance, RBNZ [Quantitative Easing] is expected to roughly double to around $60 billion in order to support market functioning and ease monetary conditions further."  

Consumer prices index

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I'm expecting stagflation. Asset prices will deflate but the prices of essential staples will in many cases increase due to supply constraints. This will be particularly acute when the value of the NZD collapses further.

The price of domestic services is irrelevant as noone can access them. However with the wage subsidy and minimum wage there is a critical level below which the price of services can't really drop.

This will all be hidden behind the headline stats, so the RB will insist on throwing more funny money at the problem.

You could be right short term. In the long term I'm expecting Deflation, which as you'd expect wrecks bank lending.

Inflation 101 is an increase in prices, as demand is not met by supply, with the caveat that price can only be what the customer can afford. See the problem!

Governments are effectively subsidising all affordability at present; and one could argue subsidising high accommodation and living costs for quite an extended period. This is all fine and well if you collect sufficient taxes to do this, however like people governments can not keep lending forever to make up between revenue and expenses.

The other rat in the closet is efficiency gains through technology, which is leading to less employment. With AI advances, this is happening everywhere and unstoppable. And it would be a lie the equivalent number of jobs lost have/are being created elsewhere.

The banks ponzi scheme is up as far as I can see, and the money printing is nothing more than life support for them in a deflationary environment. Its so obvious these banksters have too much control (for a middleman producing nothing), so bring on deflation to redress the balance and redistribute the wealth to the masses, rather than the corrupt few. There's enough for everyone, rather than the concentration happening at the top.

good excuse to raise GST? that will create an inflation bubble.

One off events like GST increases are excluded from inflation measurements

I think it would be more accurate to say that when GST was last raised by the National government (after they said they wouldn't), the RB 'chose' to 'look through' the inflation created by that policy change.

They could make a difference choice in future.

Raising GST in a recession is possibly the worst thing to do.

It reduces the spending power of the masses, which leads to an extended period of recession.

National did the last time round, giving the benefit to the higher income people who keep any spare money in their pocket until bluer skies arrive.

Everything is included. First year free for tertiary education resulted in a huge reduction in the CPI contribution from education sector. Also if you read the news from 2011, there was an inflation jump after GST went up.


I'm surprised the CPI isn't up 10%, given the prices that we've all be 'asked' to pay in the supermarkets during Lockdown!

I think the reference to below 1% *after* Q1 captures that. Won't stop rates going up though. Maybe insurance won't be so bad given the low number of car accidents..... and burglaries with people at home. Could be a good year for insurance co shares.

Yep - buy Tower shares.

You're forgetting people can hardly pay for food and accommodation at present, let allow insurance premiums.

I'm doing better than most, and even I dropped health insurance. $8,500 for a family of 5. I'm now self insuring, and saving on GST already. Italked to my broker the other day on other insurances, and they said it only went up $20 this year; all related to an increase in earthquake levies which is now the majority of the cost.

Again government pampering to multi nationals. I would say to them take their business and profits elsewhere if they are not prepared to insure for earthquakes as well. NZ inc use to own most of its insurance companies, before some clown decided to sell off the banks. Follow the money!

Honestly, we'd all be better off in terms of Predictions, just each buying one a them Cheap Sheep that the farmers can't get killed, dispatching and gutting it ourselves, mangling up a few steaks and flaps for future evening meals, and carefully laying out the Entrails on a flat surface and trying to make something of 'em.....

Chickens might be less messy....

We could take a cue from ANZ's Truck-o-meter and call it the Gut-o-meter.....

you have a spare half of a corrugated water tank handy?

Overkill for a Chicken, surely?

True, either case case though, keep the fire going, fill with water, have spa.


It shows how useless the CPI is for measuring inflation.

Inflation may be stable but peoples spending power will have taken a real kicking. I expect that will co-opt most companies into discounting or having a really sharp focus on value.

I think it is going to be deflation for few months. And then things going to be messy with inflation kicking in for short time ( months) then the shock "stagflation". But this all might be going out of window if inflation numbers have treatment like normal.

So we'll drop interest rates to negative and reduce the amount people have to spend...that's surely going to give them the confidence to spend more of their capital!

This will work this time around, surely.

it will led to more asset bubbles,

Yes - its a sick reality....low interest rates post GFC were supposed to fix this, not cause it! If was an animal, you'd take it to the vet.

"If the inflation outlook deteriorates further, we expect the RBNZ and the NZ Government to further step up policy stimulus measures. Let’s hope we don’t have to go there.

Thus instead of the central banking narrative that lower rates lead to higher growth, the empirical and verifiable reality is that higher growth leads to higher rates and lower growth leads to lower rates. If rates are the result of growth, they cannot be the cause.

This raises some new questions. Firstly, if it is not interest rates that drive growth, what then? And secondly, why do central banks keep insisting that they are using interest rates as their main monetary policy tool, when this is simply impossible? Recently, central banks have been lowering rates, while proclaiming that this is a measure to stimulate the economy. But the empirically verifiable fact is that they lowered rates, because economic growth has decelerated. Falling growth means interest rates must follow down. And what has been the role of central banks in the growth slowdown preceding the lower rates? We may presume that they had not used their vast powers to engineer economic growth – powers they worked hard to obtain in previous decades, in the form of independence with little meaningful accountability. Section II-2

Love most of your commentary, and agree with most. These banksters are going to fight till the end, but deflation will win in the end. Hopefully I'm still around to see these banksters blood on the floor.

Bartering is a better means of exchange, and so was bitcoin until the banksters created the wild fluctuation in price to scare the masses away from it. What we do know is we need a medium of exchange that is not controlled by corrupted government and their central banks. Follow the interest payments to see the source of the money. One may have to bring back torture to find the answers; but I'd be happy to be a spectator (and I'm sure a few others) to this.


I am expecting significant deflation. Particularly in the housing market, where 20% decrease in rents and house prices may likely occur.
The only areas where we are still going to see inflation: council rates and medical costs. Council rates simply because these parasites are subject to no competition nor market forces. Medical costs because there are always many factors at play (including international aspects) contributing to this being an ever-increasing cost.

You would call The Brown Cardigan Brigade parasites? What have fleas and tapeworms done to deserve that.

House prices aren’t a direct input into CPI right? This is why inflation didn’t go wild when housing prices went bananas from 2013-2018, we were still struggling with measured inflation due to low global commodity prices. Not saying it won’t be low but the obsession with house prices is a bit of a misnomer...

If housing was in inflation data. Inflation should have been so much higher.


Medical costs, this episode has shown how relevant a case of piles really is when the fan is getting covered in brown stuff. Local GPs are going broke as we talk.

So what? Interest rates are at all time lows. If inflation continues to be low does any expect the RBNZ to go to negative rates when it’s been ineffective in other countries? Adrian Orr has already indicated that monetary policy is no panacea and that fiscal policy is the key to recovery. All feels a bit irrelevant at the current juncture. It will be relevant again but not today.

if you follow this to its logical conclusion.

Farm exports value could be down %50
Forestry down also %50

Govt income from taxes collapses, but Govt wants to borrow lots to stimulate the economy ,so people can go back to buying cheap imported goods, deficit balloons.

Unemployment cracks %10 and keeps going.

All because the RB wasn't proactive and dropped interest rates to zero.

If we have deflation then we will have to move to negative interest rates. I remember reading Ben Bernanke that during the Great Depression the Fed held interest rates too high and should have gone negative. Deflation will kill the economy.

but negative interest rates destroy both capital, and capatilism.

Inflation needs to be considered in a little more granularity to be meaningful.

~ we must expect rents to go down (increased supply thru new builds, Airbnbs and net immigration)
~ local produce and fish I'd imagine pretty static (duopoly ain't gonna pass on any cost savings to end consumers)
~ energy pretty static (hydro plus low oil price)
~ rates I think we will see central govt cap councils spending to keep increases low single digit (politics)
~ import cost is going to be a function of the FX rate and the decrease in labour cost where those goods are produced ~look at NZD/AUD and NZD/RMB as the main drivers.

Overall though I see mild deflationary pressure driven by Ue and lower domestic demand.

And like Step Up above in this environment I would see very low or negative rates and a continuation of QE to maintain liquidity in the system.

With the price of oil dropping we should see big drops at pump(not yet).Hopefully mortgage rates should come down to sure up housing market. Government should force banks to lower rates considering OCR current rate.

The housing market doesn't need to be SHORED up. It needs to return to planet earth.

Exactly right. The housing market needs to re-balance itself. A significant decrease in house prices is inevitable, and good for the economy and society in the longer term, if not too deep. Interest rates artificially low to inflate or keep the housing bubble is exactly what the economy does not need.

I remember my grandmother telling me that her uncle had inherited a freehold house on Khyber Pass Road during the great depression. He had to sell it because he couldn't afford the upkeep. I'm beginning to understand now. Council rates on my Taurnaga house have increased by 9% in 2019, and 7% in 2020.

As the young folk are constantly told, "It's never been cheap to live in a global city!"

Ask kid to blow/inflate the balloon then observe when the lung capacity has been reached, strong enough breath? - pop the balloon, liked to keep the rubber? - then deflating it the only obvious path. Hence, why..

Adrian Orr should take his oar and and his kayak , paddle into the middle of Lake Pupuke , and gaze at his belly button .............. for some introspection .

The invisible hand of the rational market knows what is going on , and so do most Kiwis , even if they dont understand it .

Other than housing, which is in demand due to immigration and is costly to build , we are faced with falling prices, or zero growth in prices in almost everything else , other than housing .

Maybe Orr will one day soon call the problem we have been facing for a while now and use the D word ..........D-E-F-L-A-T-I-O-N.

He should take us into his confidence , tell us what the problem is , and maybe we would be a little more sympathy for his monumental task

Yep Stagflation. A thing discussed in a text book but stating that Govts would carefully manage things so you will never see it. Don't loose your income, be it Job or rental tenant.