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'The tyres of the Kiwi economy are nicely inflated now. But Covid-19 has caused a large puncture = deflation'

'The tyres of the Kiwi economy are nicely inflated now. But Covid-19 has caused a large puncture = deflation'

Without a certain virus, we might now all be talking about what we should do about New Zealand's rising rate of inflation.

Instead, the 2.5% annual rate of inflation announced by Statistics New Zealand on Monday for the period to the end of March comes across as an ironic, quirky and historic twist. Next quarter inflation will fall off the cliff.

Kiwibank economists have summed it up nicely:

"The tyres of the Kiwi economy are nicely inflated now. But Covid-19 has caused a large puncture = deflation," they say.

"We expect that the current crisis will see annual inflation fall below 1% year-on-year by the end of the year. Inflation expectations have fallen fast, as it will be hard for firms to raise prices in an environment void of demand. The [Reserve Bank] (RBNZ) may need to do more to ensure inflation back sustainably to the 2% target mid-point."

Cigarettes and rentals

Stats NZ said the consumers price index (CPI) rose 0.8% in the March 2020 quarter influenced by rising prices for cigarettes, and rentals for housing.

For the record, the inflation figures for the March quarter were much higher than economists had expected, with most picks being 0.4%-0.5%. 

The annual inflation rate was 2.5%, the highest since the September 2011 quarter when it was 4.6%. This was driven by domestic inflation, which remained above 3%.

But economists see the annual rate of inflation tumbling quickly to the bottom of the Reserve Bank's targeted 1% to 3% range following the drastic impact of the coronavirus outbreak and the subsequent lockdown measures employed in New Zealand.

ASB senior economist Mark Smith said on Monday that the "considerably higher" than expected starting point of New Zealand's inflation gave the Reserve Bank more "breathing space".

He said there were few signs of a Covid-19 impact in the March quarter data, with the inflation data consistent with a strengthening economic backdrop.

Without the virus, we could be looking at higher interest rates

"If it was not for Covid-19 [Official Cash Rate] hikes would likely be considered," he said.

"Covid-19 represents a massive deflationary shock for the economy and is likely to push headline and core inflation lower over the next one to two years. The OCR is unlikely to move up from its 0.25% operational low for a while yet. We expect macroeconomic policymakers to remain steadfast in their commitment to prevent outright deflation emerging," Smith said.

ANZ senior economist Miles Workman said the March quarter CPI outcome "feels like ancient history".

"We are now in the midst of the most significant and synchronised economic contraction in a generation. Labour market conditions are loosening, and underlying inflation pressures diminishing. And there’s plenty more to come. Even with extremely accommodative monetary and fiscal policy settings, the current economic crisis will prove difficult to recover from. Household incomes will be weak, and many will look to deleverage where they can. Businesses will remain cautious for some time, with investment and hiring expected to plunge," he said.

"We foresee annual headline inflation decelerating to the bottom of the RBNZ’s 1‑3% target band by the end of the year and remaining below this level throughout 2021, with only a gradual recovery thereafter. Risks to this outlook are skewed to the downside."

Rebutting the inflationary talk

The Kiwibank economists said there have been suggestions that the Covid-19 crisis, policy responses, and its aftermath will be "highly inflationary".

"The argument stems from the fact that the globe has experienced a massive supply shock (the lockdown of non-essential production) at the same time Governments and central banks have put through record support packages.

"We disagree. We believe the near-to-medium term risks are tilted towards deflation. And central banks and governments have their work cut out to reflate their economies," the Kiwibank economists said.

"For one, the shock to the economy is primarily on the demand side. Demand has been hammered by the lockdown. Confidence has crumbled as the reality of job losses and business closures become apparent.

"Sure, some pent-up demand will be released as we move down Covid-19 alert-levels. But over the next year or so the upheaval to the global economy will continue to depress demand. Inflation expectations have fallen rapidly as the coronavirus crisis has unfolded."

Data collected as usual

Stat's NZ's consumer prices senior manager Paul Pascoe said measures to slow Covid-19 by closing non-essential businesses and telling people to stay at home from midnight 25 March, "didn’t impact so much" on the normal collection of prices this quarter.

Only the last week of March required an alternative approach to collect weekly food and fuel prices, he said.

“The CPI is a quarterly measure and not all data is collected weekly. This means that some parts of the CPI may not fully capture Covid-19-related price movements later in the quarter,”  Pascoe said.

The annual tobacco tax increase on 1 January 2020 lifted cigarette and tobacco prices 11 percent this quarter. The tax increase is the fourth of four consecutive excise duty increases announced in the 2016 Budget. The Government increased excise tax on tobacco by 11.5% (see Tobacco excise increase on 1 January 2020), but not all products showed the full impact of the tax change in their prices.

“The average price of a pack of 25 cigarettes was $41.89 in March, up from $37.51 in December,” Pascoe said.

$1.70 for a smoke

“One cigarette now costs about $1.70 compared with $1.15 at the start of 2016. Ten years ago cigarettes cost about 54 cents each.”

Rents rose 1.2% in the March 2020 quarter, and 3.7% for the year. Rent accounts for around 9% of household expenditure, making it the highest-weighted item at the subgroup level in the CPI basket.

In the year to March 2020, Auckland rents increased 2.1%, Wellington rents increased 5.7%, and Canterbury rents increased 2.0%. The North Island excluding Auckland and Wellington increased 5.8%, and the South Island excluding Canterbury increased 5.3%.

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So why will inflation fall off a cliff --- or is that rally a huge technical financial industry impact

For the majority of NZ population -- we are experiencing a huge increase in inflation -- as everything we need is way more expensive in lockdown - lack of competition means supermarkets have removed virtually all their discounts and most goods seem to be pricier -- essential items on line -- more expensive -- not seen any drop in electric, water rates, council rates - ok petrol has a small drop but we cant really use it so for actual day to day expenses -- only gone and going up ! -- not to mention hugely reduced incomes across most of New Zealand - creating a further relative price increase as % of household incomes

So in effect we could experience real negative interest rates as far ahead as one dares to forecast? Double negative for rent bound prospective FHBs - who will pay most at the ballot box?


A drop in Council rates? Ahahahahaha

Dont forget the huge increases in N95 masks and hand sanitiser. LOL

really...are there still so many idiots smoking that the price of smokes effects the CPI??? WOW.

They're not idiots, they just unfortunate people who cant help themselves. The idiots are the politicians and advisers who advocated for the regressive tax. Have you seen the ending to the new joker movie? What do you get when you cross the most disadvantaged members members of society with a government that taxes 1.5 - 2 billion dollars per year from them.... violent climax

agree - very fudged figures


Deflation for 2020. Inflation and stagnation for 2021 - 22

The falling NZ$ (both against the US$ and the AU$) means prices of imports will go up. That's everything from food to fridges.

Agree, and then factor in shortages of everything worldwide as manufacturing takes a massive hit - hard to see anything getting cheaper in the medium term.


Rents should come down due to influx of Airbnb properties looking for long term tenants, that means more competition for the rental market pushing rents rates downwards. Since people won't be able to afford to go on holiday both locally and as for international tourism, well that's literally a distant memory for now until the corona virus is under control.

Rents down yes - and significantly in some areas but up in others where investors bailing due to new rules, and more demand from more tenants turfed out when rentals sold, plus formerly prospective buyers delay buying in favour of renting. So a real mixed bag, up, down - all directions.

Rent is a component of CPI, not the whole CPI.

It most be a really small share. As house prices go up 50000$ a year, inflation is still staying at 2%. While rents are biggest cost for family. It's so rigged. I bet they will use it to lower inflation. If you look at long term inflation then it would definitely go up. But numbers will be worked again as happened last 40years. So I'm absolutely not sure what's going to happen now.


Take all the discretionary things out of the CPI and then see if inflation drops..

No matter what, that just a reported .. even if it's going to be in realisation future factual event (up)? - Then our RBNZ is independent enough to 'bring it down again under control' by applying the negative OCR. It is contradictory to the economic norm, but hey! - when you've got F.I.RE economy on FIRE? - The first things to save? is that property/RE, those cash savers shall contribute against this losses, RE will be the winner for sure.

-ve OCR...In a year...


by Yvil | 31st Dec 19, 2:24pm
- I stand by my Sept 19 prediction that house prices will reach new all-time highs in NZ in March 2020
- The recent pick up in swap rates will reverse and interest rates will still fall more
- Inflation will pick up (surprising most, not me) but the Reserve Bank will NOT rise the OCR in response
- Governments will still print money and do whatever is required to keep the party going

Lol so what's you "prediction" for your rental property now Yvil? And where do you see Auckland house prices in six months time?

Yvil.where do you see house prices going in the next 6 to 18 months?been putting off a purchase for a year or two but if prices decline twenty percent or so I'm ready to do some shopping!!!!ten percents neither here nor there as even in normal times you can get that on a good deal.

No one knows where it is going. Down a little to down a lot, is the best guess.
All depends what you want. There will be deals on the table for people need to get out and others that will sit for longer.

Hi NB. I think there's really too much uncertainly out there about CV and especially how governments react to it to make anything more than a guess, which I'm not prepared to do. It's going to be a tug-o-war between businesses closing down and people losing their jobs on one side and the government and RB throwing lots of cheap money at the problem on the other side. On balance, I see more downside but as I said above, the times are too uncertain to make a prediction in my view

Thanks yvil.will wait and see.going to be a very interesting couple of years!!!!

In central otago down by 30%minimum by Xmas this year, I expect it to be even worse.


Talk about blow your own horn and not let it go.
If you were that on to it you would have sold your motel.
Let's look back on your PR to stop the lock down as the virus cure is worse than the health risk when the States really starts to esulate in infection and death numbers.

Ok then, let's look at your predictions of Sept 2019 instead:

by Kezza R | 6th Sep 19, 2:50pm
Large numberd of people with no work or taking a hit in income ='s
Can not pay your mortgage, car payments, etc a lot more houses / cars go on the market. Not many people out there who can borrow to buy and those who can are risk adverse in troubled times.
House prices fall.

haha got em

But there is a pretty good probability that this will be true given the economic forecasting? Or have I missed something?

What you have missed is a timeframe. When Kezza made the statement 7 months ago, he was not referring to CV, he made his prediction based upon what he saw coming at the time, Without a timeframe you can say
house prices will go up by 10%
and also
house prices will go up by 10%
and you will be right on both cases, it's just a matter of time, maybe a long time

Kezza's predictions seem spot on too


Yep, what a Rooster! They keep crowing, no matter what. Right up until the farmer approaches with his axe.

*thumps chest*


Or the RB will use some idiotic measure that fails to represent what people are actually experiencing (particularly the low end). But ZIRP and QE to bail out the holders of capital.

The holders of capital or the holders of debt?

Inflationary pressure, and then mass job losses. Stagflation. Thanks monetary policy that seems designed to only protect banks and the leveraged. Cash and safe income (govt as an example) is about to be king.

Ah inflation, a monetary phenomenon or is it only a phenomenon of debt and usury?

Yet we must have it, blind belief in ideology?

Deflation is a no no yet inflation on top of inflation is wonderful. More money chasing fewer items... less money chasing more items... more debt chasing more... money is debt...

When do we address the purchasing power of money and its decline?

When do we consider the real drivers of inflation rather than listening to false prophets?

Given everything that has happened of late, I'm left wondering, what is the purpose of money now?

And a prospect of paying 50%tax or more is not a motivation to come out of your bed.

WTI is $15.60 as I write. Down another 14%.

Add to oil the price of money, and the two BASIC constituents of the modern economy are at price levels not seen for decades, if ever.
And we think the price of everything else is going to go up when the price of the building blocks has collapsed?

welcome to buy my shopping for me -- pay my utility bills , rates, house and other insurances - all going up and by way more than 2% -- also no matter how cheap oil is -- flying goods around the world is going to go way up with limited options and air lines desperate for cash - the price of money never seems to impact on the daily essentials of life -- and the price of oil only effects fuel -- transportation firms do not reduce charges only increase margins

you may be confusing the building blocks of financial institutions / trading/ bonds / national finances - with real life for the 99%

I think we have to be careful about the narrative being pushed and keep an open mind. What I'm expecting is a herd mentality to kick in and the outcomes could be pretty unpredictable. Reality is that this could be just a little worse than the last GFC to the end of the world as we have known it. Lets see in what order events play out. My prediction is a lot of double digit percentages starting with a "2" like unemployment and house price falls.

'keeping an open mind' and 'waiting to see what plays out' is not a luxury available to those required to make investment and business decisions. Interesting to note the sharp divergence between Kiwibank and other economists predictions on the road ahead. And as you observe the herd mentality introduces further uncertainty. Reference to previous events provides limited illumination due to the very different central bank and government reactions this time. But one theme common to all economic upheavals is that a reordering of the material prosperity hierarchy will occur as those with the instincts and courage to match seize their moment.

Mean while over the ditch in Ozzy land... Domain news: Confidence in Australian property market suffers biggest monthly fall in 47 years: Westpac. "Confidence in the Australian housing market has collapsed, with a Westpac consumer survey recording the single biggest monthly fall in its 47-year history.

The survey, which measures Australian consumer sentiment, saw house price expectations and “whether it is the time to buy property” plunge, as the effects of coronavirus hit hard and fast."

Labour's last cigarette tax increase is a kick in the guts for the mentally ill. I thought Jacinda had earlier said there would be no more such tax rises.

Also, I would expect insurance companies to return some portion of premiums prepaid for the present and near to medium future periods.

It's unacceptable for Councils to increase their rates in these times. The consultants and senior staff and the mayor should be prepared to accept reasonable pay-cuts.


When house prices start dropping your rates %will go up even more.

Local councils are playing the "it's not us, it's them" card, saying they would take a pay cut if the Remuneration Authority decreed it.

Err. Did someone forget about the FX rate to the RMB and the imported inflation ? Cant see a single mention of it in the article.

Its not to say that most of the goods we import won't suddenly become a lot more exprnsive as global supply chains are in utter chaos. Airfreight will become unaffordable, whats that going to do to the price of things...

My guess would be a decent spike in inflation over the next 18 months. There is going to be a lot less of everything produced and what is is going to be more expensive. There will be more firms with pricing power and they are going to increase price to offset lower volume (airlines). The reserve bank will see straight through this as it is not demand-pull and they have a twin mandate now anyway.

Twin mandates being keep house prices in a bubble and keep house prices in a bubble?

there's no going back now!

There will definitely be a spike to the price of fresh vegetables a little later on as things have certainly been interupted in that area, having said that theres been plenty of wet autumns that have ruined an otherwise promising crop over the years. On the upside, theres plenty of puha about and the meat works are practically giving the kills away away which is good for those of us who are financially stretched.

What will be more interesting is seeing if cockies put all the Rams out. Heard of one today that had 16000 lambs to go to the works, they took 1500.

And there is no wet autumn this year...

I think deflationary and inflationary pressures will be split.
Rent and fuel down. Lots of discretionary stuff pan flat. Groceries, insurances inflating.

So ciggies have gone up by 15% per annum, by my calculation. Is this the true rate of hidden loss of purchasing power?

It seems roughly on a par with council rates, infrastructure construction costs, new house prices and new commercial building cost (including land).

Two options;
1) deflated the rest of tyres, so they all shall be even.. OR?
2) joined to be part of CCP province, so they shall blow the almighty air pump so much, continuously to shield that big puncture scar effect.
Either way? - to make it faster, NZ shall choose Bluey team/Soymond if you want to see how magic weapon work

"Rent accounts for around 9% of household expenditure."

I call b******t on that.

9% is a household taking home $200,000 / year and paying $1,500 / month for rent.

Make it 29% and I might believe you.