Economists expect Statistics NZ’s consumer price index data to show annual inflation stuck stubbornly at 7.2% when released on Thursday morning.
This number would be marginally below the Reserve Bank’s forecast of 7.3% but not enough to make any difference to its official cash rate forecasts.
An annual inflation rate of 7.2% would mean that prices had increased about 1.7% in the past three months, and would suggest that NZ is not really past the inflation peak.
Last June’s CPI data, which put annual inflation at 7.3%, was the highest it had been since June 1990. The read this week will likely be only slightly lower and in line with the previous result.
Concerningly, domestic inflation is expected to accelerate to 6.8%, from 6.6% in the December quarter, even as imported inflation drops from 8.2% to 7.2%.
ANZ senior economist Miles Workman said RBNZ would be most concerned about non-tradable and core measures of inflation, which are both at risk of coming in hot.
“Annualised, 1.7% quarter on quarter is consistent with non-tradable inflation running at around 7%, which is pretty scary when you consider how sticky non-tradable inflation tends to be”.
There was a real risk that domestic inflation could get stuck at high levels, forcing a round of rate hikes beyond 5.5%, even long after global inflation pressures had returned to earth.
ANZ and other bank economists expect the quarterly increase in prices to be led by food, housing, and an annual increase to cigarette and tobacco taxes
On Monday, Statistics NZ said food prices had lifted 12.1% in the past 12-months — the biggest annual increase in over 30 years.
This won’t be helping inflation, but was actually lower than many economists expected after Cyclone Gabrielle caused widespread damage to crops in Hawkes Bay.
Workman said everything from extreme weather and labour shortages, to geopolitical conflict and commodity prices had contributed to high food costs, which rose 3.7% in the March quarter alone.
Housing-related costs are also expected to contribute to quarterly inflation. Rents have increased almost 1% since the December quarter and construction costs have also lifted 1.8%.
The two categories alone make up almost 20% of the entire consumer price index, and will likely be responsible for two-thirds of inflation in the quarter.
There has also been extra cost pressure on household contents and transport groups, as people have replaced furniture and cars damaged in the cyclone.
Kiwibank economists said food prices and rent were likely the most impacted by the severe weather events earlier in the year.
“With Cyclone Gabrielle devastating areas dubbed the 'fruit bowl of NZ', it’s no surprise to see a chunky double digit increase in fruit and vegetable prices,” they wrote in a note.
“Just as we’ve seen unfold overseas, we expect inflation to be on a downtrend this year. Indeed, had it not been for the Cyclone, we likely would have seen a more convincing slowdown in inflation over the March quarter”.
BNZ senior economist, Craig Ebert said the CPI data alone will not be enough to determine whether inflation has peaked and will fall as forecast.
“And it would seem [RBNZ], from its April actions and commentary, is not in a mood to imagine inflation relief that is not starkly there”.
ANZ’s Workman said inflation data was the first in a trilogy of releases that will influence the central bank’s May Monetary Policy Statement.
“The first quarter labour market release and Budget 2023 are yet to come, and both could easily end upon the more inflationary side”.
Most economists expect RBNZ to lift the Official Cash Rate by another 25 basis-points to 5.5% next month before pausing to see how the cumulative 525 basis-point increase in interest rates affects the economy.
ASB senior economist, Mark Smith said the CPI data, which he forecasts to be 7.2%, will be influential as it is the formal inflation target for RBNZ.
However, he thinks any surprise in the data was more likely to land on the lower side of that forecast.
“Softening surveyed pricing intentions suggest there is the possibility that the pullback in consumer demand could translate into a sooner than expected moderation in inflationary pressures”
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"Housing-related costs are also expected to contribute to quarterly inflation. Rents have increased almost 1% since the December quarter and construction costs have also lifted 1.8%."
"The two categories alone make up almost 20% of the entire consumer price index, and will likely be responsible for two-thirds of inflation in the quarter."
So the removal of interest deductability on rental properties has resulted in increased rents, which is a significant contributor to inflation, which has resulted in significant increases to interest rates to tame inflation, making everyone poorer.
Unintended consequences who would have thought?
Interesting that the removal of tax deductibility, with 25% steps each year, was first used by the Torie (National) govt in the UK in 2016. Not a lot of NZers realise this, landlords think it was dreamed up by Labour in NZ. Come on landlords, dont bludge on the tax system!
The removal of interest deductibility in the UK was compensated for by allowing landlords to claim a tax credit for finance costs. This resulted in 82% of landlords experiencing no change to the amount of tax they pay (according to the UK tax office).
https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landl…
There is no such tax credit for landlords in NZ. People who think that the NZ tax changes are ok because the UK Govt did it too, are totally misunderstanding the tax situation in the UK.
Still, as the UK Govt website stated - only 18% of landlords had to pay extra tax as a result of the rule change. Here in NZ, 100% of landlords are going to be paying extra tax. And even with that low impact change the UK has still seen a shortage of rental properties post 2020 once it fully kicked in, so imagine the shortage NZ is going to experience in 2025 when zero deductibility kicks in here. Currently landlords are not seeing any impact of the tax change, because of the increase in interest rates - 100% deductibility of a 3% mortgage is exactly the same as 50% deductibility of a 6% mortgage. Tax increases will only flow through from next year when deductibility drops to 25% and mortgage rates increase to 7%.
I think we might find that real estate investments in the UK are based on firmer fundamentals than they are here in New Zealand.
You have to pay tax on gains you make on property and land in the UK even if you're non-resident for tax purposes.
So I would assume that would mean in the UK investors were after rental returns rather than tax-free capital gains which has been the case here in New Zealand. The problem we seem to have is that a huge proportion of landlords have been in it for the capital gains rather than rental returns which means these tax changes have an outsized effect than they would have in other countries.
Labour promised to not bring in a capital gains tax so I suppose they have seen these tax changes as the next best thing.
"something that was a modest earner" - yes at current house prices, it would be a much better earner if the original house purchase price was much lower. And current house prices are largely a reflection of what a good little tax free earner rental properties have been in the past (hence the need for the change).
"Of course rents will rise" - not necessarily, there is a good chance that house prices will drop until rental yields make sense again.
Due to competitive pressures the median landlord in isolation would struggle to increase rents much higher than what other median landlords are charging. But when there's a rising tide of cost increases for a majority of landlords then they'll all try to increase rents at the same time and may well be able to.
As long as there isn't a rising tide of house-owners lisitng formerly empty houses as rentals in the hope of being able to continue to afford to offset their debt holdings...
And oddly enough, over the last 15 years there's been a rising tide of landlords raising their prices as a cohort simply because they could. This could be fixed fairly simply by banning rent increases without substantial improvements. Which was one of only two recommendations I made to the 2019 submissions that were not implemented (the other being allowing pets).
Always seems to work in one direction, rents didn't go down when borrowing costs became lower, the way I see it a plurality of landlords are charging as much as they can get away with and there isn't much meat left on the bone to get any more from tenants as is.
Maybe we will see more people living under one roof to reduce costs, or other people moving back home with their parents if that's an option. We might also be seeing more homeowners renting out spare rooms to reduce their mortgage costs which could have an effect on the market.
They don't really. Interest deductibility does not compensate for the much higher purchase price of a new build, nor the lower rental yield you can achieve on what is a smaller, inferior product. eg. compare a 70 sqm 2 bedroom townhouse crammed on a section with 6 others, with a 3 bedroom house on a 600 sqm section with a double garage and a nice backyard with a vege garden and chicken coop. The numbers still dont make sense to buy a new build.
The purpose of this policy is to encourage investment in new property developments, rather than simply purchasing and renting out existing housing stock. While this approach may not be immediately appealing, it could prove to be more viable in the future if current inflated land values start to decrease.
When it comes to renters, amenities like a large backyard may not be a top priority. In fact, many would be content with the convenience of a townhouse, especially if it offers a comfortable living environment free from cold and damp.
Investors who purchase existing housing stock are not necessarily contributing to the market in a meaningful way. They are essentially acting as middlemen, much like ticket scalpers do with concert tickets. By contrast, investors who put their money into new developments are actively increasing the overall housing supply, which is a direction we should be working towards.
Now is this policy the best way of encouraging that? I don't know. It's a pretty clumsy implementation in my view but now it's been set in motion I feel as if it would be unfair to developers who have invested in creating new housing based on the assumption that these tax changes were going to be bought in.
Maybe they could come to a compromise and keep it at 50 or 75 percent deductibility for the interim but scrapping it all together without bringing in something else like a land value tax or capital gains tax risks starting the ponzi off all over again.
Initially I thought it was a good move, however it looks like many captured with interest deductibility issues are mum and dad investors who are trying to find a cash flow investment for retirement. It’s hard to find decent return when interest rates are zero, shares taxed and in many cases a lottery due to agency issues. I think the whole issue could have been corrected by increasing interest rates years ago.
I think you're correct on interest rates being too low for too long being one of the main causes of this whole mess.
But I think more of those who have been captured with interest deductibility issues are those who have overextended themselves in the race to get tax-free capital gains. And if housing was more attractive than other adequately taxed investments, that has ultimately been a failure of government policy that was overdue to be corrected in some way or another.
People with capital buying up existing housing stock doesn't actually contribute much in the grand scheme of things either, even if that is "mum and dad investors".
If anything it's quite harmful as it helped push the market up higher and higher and made it harder for FHB's to enter the market.
But those houses already existed. If they are sold, they will still exist and will still be utilized so in the end the harm is a lot more localized than what we had previously which was having wider systemic issues and putting a huge amount of pressure on those who could afford it least.
Don't get me wrong, it really sucks for those who a caught up in it, but leaving things as is could prove worse in the long term. All investments carry risk and as a society, we can't underwrite everything. At some point, someone ends up getting burnt unfortunately.
So we should allow property investors to make massive profits without paying tax just to keep inflation down? Yet that hasn't worked in the past has it, rents also seemed to go up before interest deductibility changes, if anything they are going up less than usual.
Well early on, finance minister Robertson assured Mr Hosking on radio, and therefore all of New Zealand, that inflation would peak at just over 7% and be transitory, in other words just here today and gone tomorrow. Well the height of the peak forecast might well have been accurate but the peak has actually turned out to be a whole damn mountain range of them.
I have realised that I don’t understand economic theory anymore. The motel I stay in regularly has just raised prices because the increasing interest rates have increased their costs so they have to pass it on. I thought Orr was raising rates to bring prices down.
Is including "cigarette and tobacco" in CPI figures sane when the bulk of the price is tax and the number of smokers is dropping by day?
Further ... Has anyone calculated the effects of GST on inflation rates? I.e. a supplier might increase their price by x percent so the retailer adds their margin but GST gets added to the total price thereby overstating actual price increase from the supplier.
GST makes no difference to the percentage change in price. If you put up the before GST price by 7% then the after GST price also goes up by 7%.
The proportion of "cigarette and tobacco" in the CPI basket should be relative to how much is consumed. I don't know how often they re-calculate the basket but I doubt it is significant.
Price before inflation: $1.00 > GST 0.15 > $1.15
Inflation at 7%: $1.07 > GST 0.16 > $1.23
$1.15 x 1.07 = $1.23
Note to self: do the maths before opening mouth. (My defense, weak as it is, is that I've been banging on about how inflation is causing tax creep by stealth and nobody seems to care what it doing to the low income sector, especially single renters.)
I still find it insane that we continue to focus on demand side solutions for a supply side problem
Never mind that engineering a recession that put a couple of percent of the workforce out of a job is actually considered Ok as the answer - I guess thats what you get from a caring Labour govt right
off the top of my head in NZ
Give CC more power and kick to get stuff done
scrap the penalty charges on new car imports - and roll back some of the restriction rules as to what can be imported
Dump some of the carbon charges and CC rules
Make gas supply easier and therefore cheaper - its still cheaper and better than coal
Maybe some of the rental rules that drive up the cost need to be scrapped/delayed
revisit electricity market pricing and force more competition
and make sure the bloody ferries run on time and everyday, ditto the buses - and operations are performed on time - as all these things are supply side cost drivers for ordinary people
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