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NZ CPI hits 21 yr high of 5.3% on rising petrol, food, housing prices, Stats NZ says; Even without GST hike, inflation above RBNZ band

NZ CPI hits 21 yr high of 5.3% on rising petrol, food, housing prices, Stats NZ says; Even without GST hike, inflation above RBNZ band

By Alex Tarrant

New Zealand households are facing 21-year high inflation as rising transport, food and housing prices combined with last year’s GST increase to push annual inflation to 5.3% in the year to June, above market expectations, figures released by Statistics New Zealand show.

Markets had been expecting 5.1% annual inflation, as measured by Stats NZ’s consumer price index (CPI). Quarterly inflation of 1% in the three months to June 30 was above expectations for a 0.8% rise, building on rises of 0.8% in the March quarter, 2.3% in December, and 1.1% in the September quarter last year.

The figures have economists scrambling for when they now think the Reserve Bank will raise interest rates, with expectations for a December hike firming. The strongest comment today was from BNZ economist Stephen Toplis, who said the Reserve Bank should raise the Official Cash Rate by 50 basis points next Thursday. See all economist reactions below.

Dollar rises 

The New Zealand dollar initially rose to 84.88 USc from 84.45 USc before the data.

The annual rise was the highest since a 7.3% 7.6% rise in the year to June 1990, which was also on the back of a GST hike. (Update: At the press conference this morning Statistics New Zealand advised the June 1990 rate was 7.3%, and have corrected their statement to 7.6%.)

The upside figures closely follow on the heels of another upward surprise – GDP figures last week came in well above expectations, pushing the New Zealand dollar up to a fresh post-float high of 85 US cents.

The high New Zealand dollar has been taking some pressure off Reserve Bank Governor Alan Bollard and the need to raise interest rates, as it acts as a softening factor for the prices of imported goods, such as petrol.

Economists are had been tipping the Reserve Bank would hold the Official Cash Rate at 2.5% until at least December, although if economic data releases continue to come in on the upside of expectations, talk of an October rate hike should start appearing in bank economist analyses. (Update: And it has - see reaction section below.)

The RBNZ is charged with keeping the CPI between a target band of 1-3% over the medium-term, and is allowed to look through short-term price effects such as the GST hike from 12.5% to 15% on October 1 last year, which added about 2.22% to general prices.

However, Stats NZ said if GST had remained at 12.5%, the CPI would have risen about 3.3% in the year to the June quarter, suggesting strong upward pressure on prices regardless of the GST hike.

The RBNZ is itself forecasting annual March-year inflation to drop to 2% in 2012 once the effect of the GST hike falls out of the figures, before rising slightly to 2.2% in 2013 and 2.3% in 2014.

The government’s budget documents show Treasury is expecting inflation to fall to 3.1% in the year to March 2012, before falling into the Reserve Bank’s target band with 2.4% expected in the year to March 2013, and 2.5% in the year to March 2014. Treasury correctly picked today's figures in its Budget documents.

Quarterly rise

The 1% percent quarterly increase in the CPI reflected higher prices for petrol, food, air travel, and electricity, Statistics NZ's prices manager Chris Pike said in a release.

The transport group rose 2.7% in the June 2011 quarter, with higher prices for petrol (up 4.0%), international air fares (up 6.8%), and domestic air fares (up 8.0%).

"Petrol prices reached a new peak in early May 2011 – slightly above their peak in July 2008 – before decreasing later in May and June," Pike said.

Food prices rose 1.1% in the June 2011 quarter, with higher prices for grocery food (up 1.5%) and vegetables (up 6.7%). Significant individual upward contributions came from seasonally higher prices for tomatoes (up 63.6%) and lettuce (up 30.1%). The tomato price rise also reflected a supply shortage caused by the January floods in Queensland, Pike said.

The housing and household utilities group rose 0.9%, with prices for electricity up 2.7%, purchase of new housing up 0.9%, and rentals for housing up 0.5%.

The price rise for purchasing new housing was influenced by rises in Canterbury and in the rest of the South Island, Pike said. The rise in rentals pricing was influenced mainly by rent increases in the Auckland market.

Annual rise

Significant upward contributions in the year to the June 2011 quarter came from higher prices for transport (up 11%), food (up 7%), and housing and household utilities (up 4.4%), Stats NZ said.

Petrol prices increased 20.1%, cigarette and tobacco prices were up 16%, and electricity prices rose 7.8%.

The CPI measures the rate of price change of goods and services purchased by households. Statistics NZ visits 3,000 shops around New Zealand to collect prices for the CPI and check product sizes and features.

Economist reaction

80% chance of October rate hike

Westpac chief economist Dominick Stephens and senior economist Mike Gordon said interest rate markets were now pricing in an 80% chance of a rate hike in October. It was increasingly likely annual inflation would still be above 3% at the end of this year when the increases in GST and excises taxes had left the equation, they said.

The June quarter CPI saw the expected contribution from strong world commodity prices.  Food prices rose 1.1% for the quarter, while higher oil prices drove a 4% rise in petrol and sharp increases in airfares (domestic 8.0%, international 6.8%, and package holidays 1.9%). 

What surprised us was the extent of price increases in other internationally-traded items: household contents rose 1.4%, while recreation and culture rose 0.4% (these include a number of imported and import-competing items).  However, these segments tend to be more volatile and are a frequent source of CPI forecasting errors (and they surprised on the downside in Q1), so the stronger than expected outturn should not be overinterpreted. 

Non-tradable inflation, which tends to be more stable and persistent, was slightly weaker than we expected (but ahead of the RBNZ's forecast).  Housing-related cost pressures were mixed: property maintenance materials rose less than expected (0.5%), but home ownership (the cost of building/purchasing a new home) rose by 0.9%. 

The RBNZ was already braced for an annual inflation rate starting with 5, due to a range of policy-imposed cost increases over the last year (GST, tobacco excise, ETS).  However, it's increasingly likely that annual inflation will still be above 3% by the end of this year when most of those charges will have dropped out of the equation.  The RBNZ has made a crucial assumption that inflation expectations will ease back to within the 1-3% target band, something that becomes less likely when observed inflation remains so high. 

Market reaction

The NZD rose 30pts to 0.8480 and the two-year swap rate rose 8bps to 3.50%.  Interest rates markets are now pricing an 80% chance of an OCR hike in October.  While we think that would be justified by domestic conditions, the sovereign debt woes in the northern hemisphere and the slowing Australian economy present the biggest question marks. 

ASB economist Christina Leung said the surprise for them came from the tradable inflation figures, with it appearing evident businesses were acting on higher pricing intentions. An OCR increase this year was now very likely.

The 1.0% increase in the Q2 CPI was stronger than our, the RBNZ, and market expectations. The upside surprise for us mainly came through in tradable inflation, which increased 1.5%. Beyond the expected increase in food and petrol prices, there are signs improved demand is allowing retailers to recoup some operating margins in price of imported household items. This was particularly evident in the price increases in clothing and footwear, and household contents over Q2. The result is in line with recent business surveys pointing to higher pricing intentions, despite an easing in expectations of cost increases in the coming months.

The 0.6% increase in non-tradable inflation was in line with our expectations, and suggest that domestic inflation pressures are contained for now. Nonetheless, there are some areas of concern, with construction cost inflation recording a reasonably robust 0.9% increase in Q2. Stats NZ noted the increase was concentrated in the South Island, and this suggests post-earthquake rebuilding activity is beginning to flow through to a recovery in construction cost inflation. We expect construction cost inflation to accelerate over 2012 as rebuilding activity gathers momentum.

Reflecting the effects of improved demand, there was a wider distribution in price increases over Q2 as less discounting took place. 52.3% of items in the CPI basket went up in price over Q2, higher than the 49.0% in the previous quarter.

Implications:

Today’s result reinforces our expectations the RBNZ will raise the OCR in December, having brought forward our forecast timing after last week’s strong GDP result. While the stronger than expected increase for Q2 suggests inflation is not as benign as the RBNZ would like, the 0.6% increase in non-tradable inflation indicates inflation pressures in the NZ economy are contained for now. Recent business surveys also indicate little sign of capacity pressures at the moment, with costs and firms’ capacity utilisation both easing slightly over Q2.

Nonetheless, there are areas worth keeping an eye on. Construction cost inflation shows signs of picking up as rebuilding activity gets underway. The RBNZ has highlighted this is one area of inflation pressure it will be leaning against given expectations construction cost inflation will be persistent.

In addition, there has been an increase in pricing intentions and medium-term expectations. These developments will make the RBNZ less comfortable with how inflation pressures are evolving in the NZ economy and, combined with signs of strengthening economic recovery, make an OCR increase this year very likely.

JP Morgan economist Helen Kevans said although they were still picking a March 2012 rate hike, the latest figures meant JP Morgan would review its call, with the Reserve Bank's OCR statement next Thursday holding the key.

RBNZ officials likely are becoming increasing uncomfortable with the inflationary backdrop. The CPI numbers today were highly anticipated following the upside surprise in the growth numbers last week, which showed the economy grew at a solid rate of 0.8%q/q in the earthquake-hit March quarter. Furthermore, not only was the RBNZ looking for consumer prices to rise at a slower rate of 0.7%q/q in 2Q, but the trimmed inflation measures also were much stronger over the quarter (rising from 0.5%q/q to 0.8%), and two-year ahead inflation expectations recently have risen.

Based on domestic conditions alone, the chances of a rate hike in New Zealand before year-end have increased markedly in recent weeks, meaning that our rate call (for the next hike to be delivered in March) is under review.

But, although the run of data signals that the economy may not require the highly stimulatory policy settings currently in place for as long as we currently expect, we are reluctant at this point to bring forward our call for the next rate move for three key reasons.

Firstly, the RBNZ has made clear that it will not remove the current policy accommodation in place until there is clear evidence that the reconstruction phase is underway, which we think will be a late-2011 or 2012 story. We look to see if this sentiment is maintained at next week’s OCR announcement. Secondly, we currently await the outcome of the political gridlock around fiscal policy in the US and Euro area, given that the inability of officials to come to any conclusions on fiscal policy continues to cause significant instability and uncertainty in financial markets.

And, thirdly, NZD strength, which is offsetting to some extent the stimulatory level of monetary policy settings, also buys the RBNZ more time to assess how things pan out offshore.

Awkward starting point for upswing

HSBC chief economist for Australia and New Zealand Paul Bloxham said having inflation above or in the top part of the RBNZ's band was an awkward starting point for an economic upswing. 

The New Zealand economy is recovering from an extended period of economic malaise and today's CPI report suggests inflationary pressures are also building. 

Across a range of metrics it looks as though inflation is now running at an uncomfortably high level. 

To start with, headline inflation is 5.3% over the year, which is well above the RBNZ's target band of 1-3%. Of course we know that it has been boosted by the effect of tax changes last year, but Statistics New Zealand has told us that when they abstract from those changes, headline inflation is still running at 3.3%, which is above the target band. 

Besides, the Q2 results, in and of themselves, are not affected by last October's GST increase, and headline inflation rose by 1.0% in Q2, which is well above the target band in annualised terms (4.1%). The argument, put by some, that the GST change may have had some effect on the Q1 numbers, as well as obviously impacting Q4 2010, does not really hold for Q2 2011. 

Digging a little deeper, the non-tradables component of the CPI, which is a better reflection of domestic inflationary pressures, is running well above the target band y-o-y at 5.2%. Even on a quarterly basis the non-tradables component is sitting in the upper part of the target zone at 0.6% q-o-q (which is 2.4% annualised). Q2 is also a seasonally weak quarter for non-tradables inflation, so we'd typically expect a rise in Q3. 

Tradables inflation is very strong, on the back of oil price rises earlier in the year, running at 1.5% q-o-q and 5.5% y-o-y.  Of course, we expect pressure on tradables to ease in coming months as oil prices have come down and the NZ dollar has strengthened (up around 12% against the USD since its trough in mid-March). 

Inflationary expectations have also been high recently, with two-year ahead surveyed expectations at the top of the RBNZ's target band, at 3%. 

All in all, inflation is above, or in the upper part, of the target band on a large range of metrics. This is an awkward starting point for an upswing in an economy. 

The key question will be, how convinced is the RBNZ that a strong upswing is now in train? On this, they may have some lingering concerns that some weakness from the Canterbury earthquake will still show up in the Q2 indicators. They will also be watching the world, particularly Europe, very carefully at moment, given New Zealand's large overseas funding requirement. These factors may keep them on hold for a bit longer, but with a recovery in swing and inflationary pressures building, we expect a reversal of emergency rate settings to be on the cards soon. 

Bottom line

Inflation remains above the RBNZ's target zone. 

We expect the RBNZ to reverse its emergency settings soon, with Q4 our central case, though the risk is for an earlier move.

RBNZ should hike now

BNZ's Stephen Toplis said based on the current evidence, the Reserve Bank should raise the Official Cash Rate at its next announcement next Thursday. However, Toplis added although that was what the RBNZ should do, he was still picking the first rate hike in December, but only just.

And thank goodness for the strength in the NZD, imagine where inflation might now be had the NZD not appreciated as aggressively as it has. Which, of course, begs the question as to how much more we can rely on the currency doing all the work to contain inflation instead of domestic interest rates also playing their part?

With this in mind we will, of course, be watching the July 28 OCR review with great interest. Yet again we find ourselves in the unenviable position of forecasting what the central bank WILL do as opposed to what we think it SHOULD do.

In our opinion, the only right thing to do would be to raise the cash rate by 50 basis points based purely and simply on the Bank sticking to a consistent story. The only reason that the cash rate currently sits at 2.5% is because the central bank implemented an “emergency” easing immediately following the Christchurch earthquake of February 22.

The intention was to protect against a slump in confidence and, in turn, economic activity. We argued against the cut at the time and we believe that our stance has been vindicated. The drop in confidence was very short-lived and nearly every economic indicator that has been printed over the last month or so has indicated that the economy is getting back on its feet again. The latest of such indicators was this morning’s PSI, which at 54.7 represents a fairly solid performance from the services sector. On the basis of this and the many other solid growth indicators, both concurrent and forward-looking, there is no reason whatsoever for the “emergency” assistance to remain in place.

But do we believe the central bank will be consistent? Alas, no. We suspect it will puddle along in no-man’s land in acknowledging the stronger than expected domestic indicators but also doffing its hat to heightened global risk as the reason to remain immobile.

Be that as it may, we also believe the power of the market will eventually hold sway. The more aggressive the market becomes with its desire to see an earlier Bank response the more likely that response will be forthcoming. For now we’ll stick with our December call but only just. It’s now a 50/50 pick between December and earlier. Furthermore, it’s also a 50/50 call on 50 or 25 for that first move. And, we repeat, it’s not that today’s CPI has changed our view of the world very much at all but more that the market awakening to the inflation risks that lie within this economy has now pushed market pricing to such a degree that the central bank governor can no longer hide behind it.

Political reaction

Prime Minister John Key said the rise in the CPI needed to be put into perspective in the sense part of the rise was due to the GST increase.

“So if we take that out, inflation would be running at about 3.3% - so very slightly above the band," Key told journalists at his weekly post-cabinet press conference.

“What New Zealand’s facing in terms of higher inflation - which is primarily around food, petrol, electricity - that’s not unusual. Pretty much most countries in the world are suffering that at the moment," Key said.

"So our view is the long-term outlook for inflation is one where it comes under control, and if we take out that extraordinary bit then it’s, as I say, above the band, but not dreadfully so," he said.

Asked whether it was worrying that New Zealand had inflation above the band at the beginning of an economic upturn (see HSBC economist Paul Blowham’s comments above), Key replied:

“Well typically the band’s running at 1-3%. Typically it’s always near the top end – that’s not unusual over the span of the way the Reserve Bank governor manages things. We’re in a lot better shape than when we came into office, which was, inflation was running about 5% at the back-end of Labour’s term in 2008, interest rates were ten and a half per cent, and as I say, if you take out the extraordainary one-off adjustment for the tax switch then we’re running at about 3.3%."

“So, a little higher [than the band], but as I say, those factors are prevalent everywhere around the world. You’ve had high oil prices, high food prices, a number of natural disasters and events which have impacted on food [prices] around the world," he said.

Whether there would be increasing pressure on prices as the economy recovered, Key said that depended on what drove inflation.

“If it was wage inflation because of capacity constraints then that’s a different factor to the fact that there’s been floods in Queensland [that have] forced up food prices," he said.

“Internationally, yeah, there is concern about inflation. You’re seeing higher levels of inflation than people would probably like in China and Russia, and other parts of the world. For the most part, as I say, in New Zealand I think we’ve broadly got it under control."

'Cut spending'

Meanwhile ACT Party leader and former Reserve Bank governor Don Brash used the opportunity to call for government Budget spending cuts. See his comments below:

News that New Zealand’s rate of inflation has hit a 21 year high of 5.3 percent should come as no surprise, according to ACT New Zealand Leader Dr Don Brash.
 
Under the Reserve Bank Act, the Governor of the Bank is responsible for keeping inflation between one and three percent.
 
“During my time as Governor of the Reserve Bank, New Zealand and the rest of the western world succeeded in taming this monster, probably in the nick of time,” says Dr Brash.
 
“Inflation has an especially devastating effect on those on fixed incomes and at lower socio-economic levels.  It is a potent destabilising force that can threaten the very future of western civilisation.
 
“While the new figure is undoubtedly due in part to last year’s GST increase and factors outside our control such as weather induced food shortages, it does underscore the need for governments to refrain from exacerbating it by spending too much and running up irresponsible deficits.
 
“The renewed spectre of inflation is another reason for voters to give careful consideration to ACT’s economic policies, which include bringing spending under control and achieving a balanced budget as soon as possible,” Dr Brash concludes.

(Updates with reaction from PM Key and ACT leader Brash, BNZ, HSBC, JP Morgan, ASB, Westpac comments, comment Treasury correctly picked today's figures)

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99 Comments

So we have

a) Inflation at a 21 year high of 5.3%

b) Forward GDP printing at 3% plus per annum

c) Interest rates set by the RBNZ at record lows of 2.5% (the RBNZ apparently is mandated to control inflation).

 

OK lets all sing together:

One of these things is not like the others,
One of these things just doesn't belong,
Can you tell which thing is not like the others
By the time I finish my song?

Did you guess which thing was not like the others?
Did you guess which thing just doesn't belong?
If you guessed this one is not like the others,
Then you're absolutely...right!

 

Songs, andyH! How about these lyrics, sung along to the tune of The Colonel Bogey March:

"Inflation....In everything you need,

De..flation...In everything you own..."

Taking GST hike off, the inflation is still 2.8%. 

and that's very near their 3% limit

Ouch..Bolly would have freaked when he saw these figures...he shouldn't have lowered for the earthquake

Gloom - clearly you did not trouble to actually read the article:

''However, Stats NZ said if GST had remained at 12.5%, the CPI would have risen about 3.3% in the year to the June quarter, suggesting strong upward pressure on prices regardless of the GST hike''.

As per above:

"However, Stats NZ said if GST had remained at 12.5%, the CPI would have risen about 3.3% in the year to the June quarter, suggesting strong upward pressure on prices regardless of the GST hike."

to hike or not to hike?

hiking would push the NZ dollar even higher

but can these inflationary pressures be ignored?

Shame we have such an inept, weak at the knees government, that still wants to tax peoples interest when they are already going backwards against inflation.   Then they have the nerve to try to pretend they have helped rebalance the economy towards saving, what a joke, they are destroying savers, and the economy with it.  

The RBNZ needs to get interest rates up quickly and this weak goverment needs to get some type of capital controls or capital gains tax in fast.

Hike interest rates at the same time as introducing an FTT.

Clearly these conditions are screaming out for a rates rise.  Do our low interest rates indicate that the Govt is telling Bollard to forget his primary duty to control inflation and stoke inflation as a response to the world debt bubble as per the US.  Or is he perhaps displaying "'sensitivity" to the upcomming election.  It would be the first time that I have noticed that. 

 A staggering $ 146.- in total.

 Fight for survival – here in NZ.

This morning back from the local supermarket - purchased some necessities – you know healthy vegetables and eggs, milk, chicken, rice, flower, ingredients for bread and cookies, 4 apples, 4 bananas, a container of dog/ cat food and some toiletries – 2 recycling bags of items –  price - a staggering $ 146.- in total

Under climate change and other scenarios pushing up prices even more in the near future – how on earth are average families going to survive financially ?

...and no prices aren't coming down

...and we see hundred’s of businesses in agriculture go bankrupt.

Well to start with look at the price of anything organic....take that as an indicator of future costs/bills.

I dont know why you think argricultural businesses will go bankrupt? (Im sure some will mind) consider,  food is a necessity.  When the going gets tough and ppl have time to adjust, other things will go.  Also poor ppl eating at McDonald's, it isnt cheap....not compared to eating at home....

Purex? I think is losing money, that cant continue, manufacturers are putting sh*t uh i mean fractose into more and more food (I refuse to buy it) to save costs. Someone in here recently said supermarkets were feeling the pinch, I know Ive taken to the farmers market, I must save $20 a week on fruit and veg....so there are silly margins...eg $4 manderins in shops or $1.50 /kg in the market and they are better...

Now we see CPI is 5%, but is that 5% when you compare quality? I suspect if the ever increasing % of fractose is anything to go buy, no.

Average families, well the key here will be debt I suspect, whats the biggest bill that can be cut back? given time? a mortgage, this means I can but see house prices continuing to drop...Olly is nuts if he thinks ppls pockets are bottomless......

Will the bank raise the OCR? I cant see how, these rises are not compensated for by wage increases....so the bank can sit on it hands a while.

regards.

 

Wow - where do you shop?

 

    I wonder?? Rate rise equals more forclosures..More forcolsures equal..Falling house prices..Falling house prices equal more wealth destruction. More wealth destruction equals a more stressed job market.Lucky we are in Noddy land because when the SHTF at least we can eat.

   America is having big social probelms with fewer police and gangs of youths hitting stores and grabbing what they want.These seem to be historical times.

Agree....

regards

Nice to see that deflation is such a...er...oh I guess there isn’t any deflation. And before you go patting yourselves on the back for demonstrating such a “robust” economy let me remind you Inflation is completely out of NZ control. It would be even worse if the NZD wasn’t allowed to float. It should be much higher to counteract all the inflation the US is exporting to the world.

The new paradigm moving forward will be deflation in everything you own and inflation in everything you need coupled with low wages...welcome to the new Hyper-Stagfaltion era!

 The fall of societies is increasingly unavoidable.

Time to make sure philosophers govern countries in stead of politicians/ bankers/ policymakers / lobbyists/ .

... and other corrupt elements.

It doesn't happen - Walter you are dreaming again.

I know - no wonder that field is grey and not white.

I'd rather have a scientist govern then a philosopher.

 Skudiv – I’m sure a government driven by philosophers would be intelligent  (wise) enough and include scientists at least as advisers.

I'm not sure if the opposite is the case.

http://krugman.blogs.nytimes.com/2011/07/15/sticky-note/

Core inflation (in the USA) is 1%....and looks like its heading down...

Deflation, sure is in somethings, I just got a new (blue) makita drill, $142 down from $187....eyeing a makita (green/weekender) circular saw currently at $129....down from $147, down from $185...makita (blue) 1/3rd sheet sander, $135....not sure what it was.........

Bamboo flooring, same price ($75 a metre) but they pay the freight....saving at least $25/metre....

"welcome to the new Hyper-Stagflation era" If indeed we dont enter a depression with deflation, yes it will go that way, too much debt and too high a price for energy....but I think the latter way more likely as everything is interlinked.  When some items/sectors demand and get the same sized slice (or bigger) of a shrinking pie, others have to shrink so much they collapse....when that happens there isnt enough left of the economy to hold up the economy.....just look at the US.....everything there is broken....its almost like inertia is keeping it going....but when it starts to drop I dont think it will be stopped....hello 1930s.

regards

Its too bad I can not eat a makita drill or stick circular saw in the gas tank? (well some of us already know the gas tank equation)

Perhaps i can swap some bamboo flooring for some electricity instead?

Bi flationary might be a more apt term in regards the true nature of things?

Overall you need to look at your living costs for the year (or possibly 2 or 3 years) and not the week.  When we talk inflation or deflation or stagflation we talk about the macro effect, so we consider NZ's population as a whole. Exmple some ppl will be hit harder by say petrol prices than others.  eg I use public transport so my costs are pretty fixed and constant and at $90 a month for the pass and $70 a tank per month pretty low, $160.....however I know ppl in work who use 1 1/2 tanks of gas in a SUV per week plus parking at $40 a week....so their cost of get to work a month is more like $700....and of course many will have that SUV on HP....

Lets say flooring, you might replace it every 20 years say?  at $15k?....or $750 a year....Im looking at a 25% discount....so my cost per year is $562.....

That saw lasts say 10 years.....$19 a year reduced to $13 a year....

What is the effect of this on Placemaker? Makita?  their margins are shrinking....so they sack sales ppl....that is highly deflationary, suddenly we have workers who dont work so cant afford to buy anything but the very basics this impacts their food buying ability take a look at the US for that effect....plus the increasing burden of welfare so we have to borrow or increase taxes, these are all deflationary in nature.

Look back to 2009, we saw what happened when the US economy and then the world economy collapsed oil dropped to $35 at once stage as demand dropped off, but crept back to $75....as china and india took up the slack.....so what did the US and World do? put QE in place and large stimulus, which they are unlikely to repeat....and its about to be needed again....the US Congress for one wont do that stimulus a second time when the sh*te hits the fan, they will stand by and watch....this means depression and deflation.

Bi-flationary, there is a term called stag-flation.....Japan suffered it for 20 years and has never recovered....but they didnt have an oil shortage to contend with til now....

Simple this just screams deflation and depression...

regards

 

 

 

Once again Defaltion in eveything we own and inflation in eveythign we need. While your gett circular swas 30% off my...food bill just went form $200 to $300 per week for the same food items. And it when form $70 to $100 to fill my tank. Oh and the CPI in NZ is over 5% Just FYI!

Troy - succinctly put.

I came at it in 2005 - wondering what a reduction in work do-able would show up as. Clearly average incomes had to reduce relative to purchasing of goods/services.

You could assume that essentials would outsurvive discretionaries on the shopping lists (so you don't want to own a fashion shop, but a market garden should be a good bet - although there's an argument that the fashion may be bought to attract a market-garden-owning mate.....)

It also means that debt becomes harder to service - although it is probable that interest rates will trend to zero. No other rate can be underwritten, which suggests that using them to 'curb inflation' will have one effect only: to speed up defaults.

In that scenario, the cashed-up usually rub their hands and descend like vultures. Whether they do so in a long-term scenario where all values must trend down, is the new question.

May you live in zero-interesting times...........

CPI is transitionary and yes I know its 3.3% when you remove the GST hike.....you cant set policy on something so volitile....say 6 months from now and oil is back to $35 where will CPI be?

Where are the wage increases to meet the core let alone CPI? very little, unemployment is still quite high here and in the US looks to be set to go a lot higher....

We need oil, yes? yet it could be $35 next year....we have had huge climate events this has pushed up the food / commodity costs a long way.....next year could be a "normal" year and a lot of those gains and costs fall back.....

The hyper-infaltion you see is a longer term event, you cant predict such without all the factors being in place and they are not.....the factors that are in palce is deflation and a depression.....sure some things will cost more, maybe, but overall most things will cost less....

regards

 

So I'lll put you in the "let them eat iPads" camp then?

Instead of the ipad I'd prefer an Asus EP 121.... At this time only....  In 6 months, I'd prefer something else as the EP121 is a  bit pricey at this time and I'd prefer something of similar specs that was cheaper...

Most of the apps I'd want to put on my kiddies computer are windows ones at this time...

The inflation genie is pretty hard to put back in the bottle once people start building it into their price and cost expectations.

The housing bubble seems to be inflating again too.

Time for the RBNZ to increase interest rates? Hopefully the market has already built it into exchange rate expectations because the last thing exporters need is yet another upward spike in FX.

NB this is in the past.....we just went over or are about to go over Peak oil production....htis is a paradgym shift in how the World's economy will work....

regards

The BNZ-BusinessNZ PSI index shows rising and positive services sector confidence ...
http://www.interest.co.nz/charts/confidence/psi-index 
and
http://www.businessnz.org.nz/file/2125/June%202011%20PSI%20Release.pdf

Someone, anyone pray tell me why hiking interets rates now would not trurn us into a nation of tramps?

Exactly.....neo-classical bank economists are sooo useful....not.

regards

so much for saving.

Yep, seriously considering taking the cash out of the bank and going on a celebrity-like shopping spree... Or maybe filling up the attic with toilet paper and baked beans like Wolly suggested a while back :)

Seriously, where's the incentive to save when inflation is high and saving rates low, and even lower after taking tax on interest into account? Might as well splash it all on fancy holidays (and toys for hubby).

When GST was increased it was anticipated that we'd get a figure of 6% for a quarter. This is it, and it's lower than suggested, at 5.3% ! Once this washes through we get back to the grind of continual CPI increases at a lower level, and a deflation of asset prices ( nominal and/or real). But if I'm mistaken, and interest rates rocket...well those asset price falls may really take off.

 The government should fill the beehive attic, purchasing gold worth billions  – now (better 12 months ago) ! Then when it reaches top price in the near future – sell it – and start rebuilding a healthy state of finance with the intention of strong incentives to tackle unemployment, inequality and an unbalanced economy.

In 1980, Walter, a dealer in London told me to" Buy gold with your ears pinned back, if it goes below $700 per oz!". It fell back to $700 ( from $850'ish), and continued falling fot the next 15 odd years to bottom out near $250. Sure, New Zealand could buy gold. But what if this, now, is '1980' all over again? I don't know if it is, or it isn't. But is the New Zealand economy big enough to be able buy gold.... and be wrong? We're in enough strife as it is, without gambling on what's left of our futures.

 Signs of NZdesperation – yes .

1 ) My analytical judgment reading the market and other worldwide developments tell me, gold can only go up US$ 2’000.- plus  in the near future.

2) On the other hand our economy is very unbalanced, one- sided tourism and agriculture based and therefore risky to fail, considering current worldwide developments.

put in in the attic and not fix the leak 

Buy some physical gold and silver something tangible anything tangible and go spend the rest...I dont even care what gold and silver cost anymore to purchase...

Sounds like I need to go to the jewellers :) Annoyingly, spending the savings wasn't really part of the "plan" (yes, there was a plan - saving for the kids & retirement). Well, it's all about being to adapt I suppose so I guess I could be convinced to go buy a few nice gold & diamond rings!

Aye had a plan too but im disengaging from this system as much as possible...

Keep it simple 1 oz gold and silver coins or kiwis and ferns...

I no nothing about jewellery and numismatic coins...

but i do know that a one ouncegold coin here in NZ is the same price in another country with one ounce gold coins like maple leafs in canada... theres a reason fighter pilots operating over enemy areas if shot down carry some gold coinage its universal! 

to be very simple about it!

If we flick into deflation, cash is king.....and consider what savings are for....rainy days...

regards....

If I understand correctly under Labores CGT if inflation was 5% and your house went up in value by 5% you would have had NO capital gain yet if you sold you'd still get a tax bill for 15% of 5% of the gain that you didn't get?  Is this true?

Yes it is, Bob. Labour wants you to pay tax on capital gains that don't, in real terms, actually exist. This is the extent of their economic genius.

Luckily, "our" houses (the one's we live in) are exempt.

The current government is making you pay tax on interest on gains that does exist either, thanks to inflation way higher than interest rates.

Such is their economic genius.

This in an environment where every commentator and every economist acknowledges that NZ's biggest problem is lack of savings.

So all a CGT would do is make things even again, if you're not going to stop taxing interest, which we know will never happen, not from these guys anyway.

Yep,  ....but oh wait, if you gear it correctly as a loss your PAYE tax rate can be 16%....

So we can conclude that unless you have a cash positive business it makes no sense to aim for Capital again....so being a PI for many makes no sense.

regards

Westpac forcasted that RB of Aust will cut interest rate soon.  If it's the case and RBNZ lift our interest rate, NZD will blast off like the last shuttle flight - great time for NZ exporters...!

So let's say that the Reserve Bank hiked to 3.5%, then mortgage rates went to 7+% - then which prices would fall?  Petrol?  Groceries? Rates?  Insurance? Probably not.  So the householder would be squeezed further.   Maybe house prices would fall.   Which may be a problem for the banks.....  

BTW: Bernard, - can't seem to login on the iphone for some reason -  case sensitivity?       

Agree....

iPhone, if it plays up do a hard reset....usually fixes "funnies"

regards

Watch as Bollard & Co and English completely ignore/play down this obvious reality via leaving the OCR at a near historic low regardless of actual inflation. Bollard & Co only care about one thing, and that is protecting the property bubble they helped create right to the bitter end. And this will end very bitterly indeed

If they dont protect the property bubble it will indeed end badly....its so big and so inflated that a "pop" to say 50% would cause mayhem....do you really want that? I know I dont, not very fast anyway say <5~8% per year, OK, >10% bad...

OCR, when you have push inflation and no wage rises to compensate it cant last....

regards

As you say they are Australian banks.  So who gives a toss if they take a bath in the NZ mortgage market.  They have very deep pockets in Australia.  In fairness to Bollard I can remember him practically begging them to stop importing cheap foreign capital, compedatively lowering the interest rates, and lending mortgages on 5% deposit while he was trying to stabilise things last time we went through a rising cycle.  They all but gave him the fingers, so they thouroughly deserve everything they get.

Hold your fire Bolli -   if interest rates go up I dunno where Mr Average NZ wage earner and small business  is going to find the cash, when they allready in negative earnings growth after inflation

Perhaps it shouldnt have been allowed to progress that far to start with?

Just a obvious observation...

Cue Bono?

Whether all the adjustments Stats NZ made post earthquake prove accurate is something we won't know for a few quarters yet.

Remember quite a number of CPI survey participants are no longer included given that businesses or properties have been destroyed (we used to have 5 dwelling units in the CPI survey all are now excluded).

So I wouldn't get too excited about the result as the likelihood is that there isn't actually any recovery and the economy is still very fragile - tax receipts will prove this.

Now looking back at GDP, is it not a concern that despite the entire CBD being unusable in ChCh and at least 15,000 severely damaged to make them not really habitable, that for the 5 weeks or so of Q1 after Feb 22, nearly $100m of possible rentable income in ChCh should have been lost, which for ongoing quarters will likely be $200m plus - however I can see no allowance made in GDP figures which account for that level of income loss.

Also the Gross Capital Formation figures don't take into account any loss of fixed assets, which of course means that all the rebuilding etc will be included as items that increase GDP, without the original loss/destruction of those items being deducted from GDP, so what we will have over the next few years is strangely strong GDP which probably doesn't reflect reality.

What's the saying?  There's lies, damn lies and then there's statistics.

Updated with BNZ's Toplis saying the RBNZ should hike the OCR by 50 basis points next Thursday

It’s worse than that since economist fancy themselves as “artist” since economics is more of an art then any tangible science.

Raise interest rates please, I only owe $14K so I would like higher interest rates when I have excess money in the bank come October onwards.

Raise it 3% in the next year and I will be happy, no one to owe money to and it will be worth more than inflation.

Shrug.

Inflation is government policy everywhere in the western world so it has to take hold sooner or later.

The odd story is, having created the high inflation they want people to put their cash in a bank to devalue!?

And if people are evil enough to put it into a house instead ... well time for CGT.

From this logic we can see if enough people turn to the evil of gold for long enough it will attract a tax of some kind.

Topliss is right. Bollard needs to reverse the earthquake cut and bloody soon. Inflation is away and gone ahead of the Chch cost push we all know will happen. People need to realise 3.3% is the "official" figure...and it's so accurate!

I expect the Kiwi will climb on this news, Higher rates are a certainty.

Updated with reaction from PM Key and also Brash.

Hey, high inflation's good for me in one sense as long as my wages rise with inflation - got a zero interest student loan.

The high exchange rate has also helped keep inflation artifically lower, due to all the imported electronics which have droppped a lot in price. I wonder what the inflation would be if they removed imports from the figures.

Interest rates have to rise urgently, as inflation is way too high. Sure this will push up the dollar a bit, but that is rising anyway due to the weak US dollar.

just saw Gareth Morgan on Campbell Live, confirmed in my mind that NZ faces a rocky road ahead 

don't hike the OCR, and we will keep seeing inflation do its nasty business

hike the OCR, and exporters hurt even more

its a true conumdrum

But according to JK and the bank economists we are entering into a rosy period of growth so all will be swell 

It wouldn't be a conumdrum if this government wasn't so weak it that it just sits there on it's hands doing nothing about it, and criticising anyone that comes up with ways of addressing it.

The government overborrowing has been hurting the exporters even more. Basically there is no easy answer However interest rates do need to rise, as Garath said. Basically if you are a saver, you are losing money by saving, as inflation is outstripping interest rates by several percent. If the government wants people to save, interest rates must rise.

I agree- on balance I think rates need to rise SOON

but thats gonna hurt some exporters

whatever decision is taken, growth will suffer

keep the OCR as is, and inflation will bite further, eroding disposable income

raise the OCR, and the housing market will slow, and manufacturers and exporters will hurt further   

Growth is a false myth Growth economics when examined is nonsense always was.

GDP is another nonsense. 

Consumption in the past was a term for TB. That was rather deadly for the consumer...

Matt in Auck - you've been here long enough - please explain how much growth you expect, for how long?

And perhaps what will fuel it.

Fix those floating interest rates now. Rates are going to rise as they have in Australia to 7 per cent plus. The first increase could happen at the first opportunity Bollard has to give us all a kick in the pants. Inflation is simply destroying our capital. And with those day to day expenses such as power food and insurances moving upwards we are going backwards income wise also. And houses can continue to go up in value in this scenario. You have to be dreaming. Watch them struggle to keep up with inflation let alone beat it.

Personally, ex-agent, I'm still going to wait a while before I borrow ( and then wait some more, before I buy anything!). Even the Aussies are starting to see what may come for interest rates. We may match those of the USA, Japan and Europe, yet. Do our exporters, what's left of them, need a higher kiwi that will come with a rise in the OCR? Or do they need lower ones, that would come with another 'shock' OCR fall? 

"The (Australian) market is now pricing in a 25bp rate cut by October and 50% chance of a follow on move by February next year."

 

Agree with that, Australia will cut interest rates and it will solve NZ`s inflation problem by slowing the exporters sector. Don`t think NZ will rise rates untill late in the year.

Aus has a strong advantage over us in being able to cut their rates quite a bit from this point

We can't go much lower even if we wanted too

We have a weak-ish economy AND some nasty inflation - stagflation?

Aus are just burdened with a weak-ish economy (outside mining)

I'm very comfortable with my upcoming move to Aus - things won't be easy, but their starting point is (In my view) better than here

Good move Matt in Auck!  I moved in April to Brisbane - Although I miss NZ terribly I do find that it's much easier to get started and a bit more postive here!

PS. small point, apply for your Tax File Number online few weeks before you arrive - takes four weeks to get that little number -> If you haven't got one = higher tax!  (you will need your aus address when applying)

Thanks Moa, good tip!

yeah I'll be Matt in Aus soon!

I'm sure I'll miss NZ too - I'm keeping an open mind as to whether its a 3-4 years move or totally permanent

Arrrgh... our loss, their gain ... becoming all too common, but best of luck there and hope you do keep in touch as Matt in Aus, or Matt ex Auck. :(

 

I'm sure I'll keep coming here, as there is great debate and will still care about these issues

I left NZ with a heavy heart.... but NZ will always be home! 

Thought the same but two and a half years later , two countries and a couple of visits back home I've adjusted. Our son is not interested in returning and will shortly go to live in Taiwan. NZ has a lot of issues to deal with. Still all said I could murder a bucket of fresh feijoas.

Likewise, we only have 4 months left  to go, here. Funny! I lived in Aussie for 20 years, and never got a passport; but I 'citizened up' here, thinking 'this is it!'. Just shows; Good things don't last forever.....

DON'T LEAVE ME ALONE HERE WITH WOLLY!!!

I don't suppose it's much comfort but I'm staying :) For now anyway.

Me too - Oz Gillard govt  is in the grip of Greenies carbon tax meltdown which could mange their economy yet

Not sure what to make of your syntax.

There is indeed a problem with just a carbon tax; it doesn't - on it's own - sequester anything in a physical sense.

Nor is there any real way to do so - we simply have to morph from fossil fuels to renewables.

That has to be done irrespective of whether hip-pockets get fatter or thinner.

You're beginning to remind me of someone.......

I think the mindset of a typical right wing / libertarian extremist is so similar between one and other they are like clones....no matter.

regards

yet these were voted in....so this ETS etc is what the ppl want...unlikely to mangle the economy....in fact it might help save it.

I also note we have the right wingers/libertariioans saying oh look no deflation yet or look the property market hasnt exploded yet so it wont so haha and in the next sentence a carbon tax will destroy the economy just you wait and see.....

Yeah right.

regards

An Ozzie take on Juliar and the CO2 tax. ( note it's not carbon )

 

http://www.2gb.com/index2.php?option=com_newsmanager&task=view&id=9419#.TiP-ztvj0CM.email

Ex agent,  are you for real? 

Not so long ago you said that property price is dropping and continued to be so.. Remember your statement of hundred and thousand of emptied houses in Hamilton!! now "houses can continue to go up in value in this scenario" so what changes in the last few months? 

The truth is if RBNZ hike our interest rate, NZD will sky rocket and stunt that little growth we had in the economy.  Also watchout for the big brother across the ditch..he's starting to sneeze and we will definately catch a cold from that!

Infaltion at a record high. Struggling families are being put in an embarassing situation with  a school making the latest iPad on its "compulsory stationery list". 

http://www.stuff.co.nz/national/education/5304084/Schools-iPad-requirement-divisive

that school must be dreaming - probably got mixed up with OSH requirements for first aid kits to contain eye pads

Campbell live  yesterday night  compared  this woman's shopping cost now  VS September 2010 . It cost 20% more.  So for most people inflation might be a few times more than the CPI.

This thread has made for some amazing reading.

My, how some views have changed! Breath-taking stuff.

Even ex-agent...saying house prices will rise :-0

And some of the other gloomsters...off to Aussie...just as their economy looks like it might start slowing down. :-)

Still...those who are recession-minded like to stick together. An example is this website.

PS: What's that other interest.co.nz report today saying? More jobs in the region? Well I never.

charming person aren't you?

Actually I think the Aus economy, despite the current downturn, is a lot better placed than NZ. A lot more diverse, less indebted, more capitalised, plenty of room to cut its OCR, not one natural disaster away from ruin etc etc  

And  before you get too gloating with your comments about the weakness of the Aus economy, any big slowdown there will also have a big effect here - you are kidding yourself if you think NZ is immune to the effects of an Aus slowdown

Question - what country has largely sustained NZ exporting and tourism over the past 3 years

Answer - Australia

So in my view, even if Aus bums out and I find myself in trouble, well  I probably would be in trouble in NZ too as a result, as the economies are so interlinked

 

CM I was actually asking a question. Except for some pockets in Auckland where there are some rogue sales generated by people paying over the odds to get into the Grammar Zone or close to work, prices are still falling month by month throughout the country. Volumes are up in some  months then back to low volumes in others. Buyers are picky and know they have the upper hand. Higher interest rates are going to bring values back even more and when you add inflation you are really going backwards. Australia is starting to turn and that will not help NZ sentiment. Just look at how bad retail is in Australia and you know they are hurting really bad over there. Too much debt and the cost of living is going up by the month. Something has to give and it is generally the big mortgage. This is a good time to have no debt on the mansion you live in and if you have debt it needs to be affordable as the other costs of living are looking like they are going to increase. Fix those mortgage rates quick.

CM I was actually asking a question. Except for some pockets in Auckland where there are some rogue sales generated by people paying over the odds to get into the Grammar Zone or close to work, prices are still falling month by month throughout the country. Volumes are up in some  months then back to low volumes in others. Buyers are picky and know they have the upper hand. Higher interest rates are going to bring values back even more and when you add inflation you are really going backwards. Australia is starting to turn and that will not help NZ sentiment. Just look at how bad retail is in Australia and you know they are hurting really bad over there. Too much debt and the cost of living is going up by the month. Something has to give and it is generally the big mortgage. This is a good time to have no debt on the mansion you live in and if you have debt it needs to be affordable as the other costs of living are looking like they are going to increase. Fix those mortgage rates quick.

Chairman Moa is right, rise interest rates give the dollar a bit more of a leg up towards 90, and watch the fall out in regards to growth. Like it or not hundres of thousands have a mortgage, Inflation is high, last thing government  will want is extra pressure on these voters. If dollar breaks 90 it will be jobs that you should be  worried about, and how to pay the mortgage and house accounts, won't be bugger all left over for savings.

 

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