Westpac economists are predicting that annual inflation will be just 1% for the year to September 2016, which is well below what the Reserve Bank is forecasting and aiming to achieve.
The RBNZ has an official target of keeping inflation within a 1%-3% range, with an explicit target of 2%, but it has been falling well short of these targets for a long time now. The central bank will be releasing updated economic forecasts next week with its December Monetary Policy Statement. But in the September MPS it had forecast that inflation would get back to the mid-point of its 1%-3% targeted range by the September quarter next year.
However, Westpac economists, in their weekly commentary, say the RBNZ is facing an uphill battle.
"Inflation has been below the RBNZ’s target band for a year now. And although the fall in the exchange rate since mid-2015 will result in some lift in prices, a sustained pick-up in inflation back to 2% still looks elusive. The main reason for this is that domestic growth is set to slow, which will result in continued downwards pressure on prices."
The economists said that looking to the year ahead, they do expect some pick-up in inflation in the early part of 2016, with earlier weakness in petrol prices set to soon drop out of annual figures. In addition, the exchange rate has fallen by more than 10% since mid-2015, which will gradually pass through to higher prices for many imported goods.
"Nevertheless, we are sceptical that this pick-up in inflation will be sufficient to meet the RBNZ’s 2% inflation target. In fact, we’re forecasting that inflation in the year to September 2016 will be just 1% - right at the bottom of the RBNZ’s target band."
The economists said the key reason they expected inflation to remain so stubbornly low is the strength of domestic demand.
"Over the coming year, GDP growth is set to slow as the economy confronts a number of significant headwinds. These include drought, lower dairy prices, a softening in the housing market, and the plateauing of reconstruction activity in Canterbury. These conditions will result in unemployment rising and consumption spending growth easing back. Such an environment will make it hard for retailers to push through price increases.
"At the same time, we’re seeing downward pressure in terms of some key operating costs for business. Lingering weakness in the global economy is weighing on the prices of many internationally traded goods. This includes industrial commodities that are used in the production of other goods, such as fuels and metals. It also includes consumer goods that New Zealand imports, such as clothing and electronics."
The Westpac economists said there has been strong growth in New Zealand’s productive capacity in recent years. This has meant that the economy has been able to grow without generating significant cost pressures.
"One area where this can be seen particularly clearly is the labour market, where record high net immigration has resulted in a significant boost to the size of the labour force. This has helped to address specific skill shortages, such as the need for specialist labour for the Canterbury rebuild. However, the large increase in the labour force over the past year has also had a dampening effect on wages. And even though the current strength in migration will eventually turn, wage inflation is still likely to remain low for some time.
"On top of this softness in demand and subdued cost pressures, there are some ‘special’ factors that are weighing on inflation. First, the coming years will see lower rates of increase for some government charges, such as the tobacco excise tax and ACC levies. Second, the continuing shift to online retailing and the related increase in import competition are likely to keep pressure on margins for some time."
The economists said that when all these things are put together, the RBNZ "is going to have its work cut out for it" in terms of generating a sustained increase in inflation back to levels close to its 2% medium-term target.
They reiterated that they are expecting the RBNZ will cut the Official Cash Rate at its upcoming December decision and that the OCR will continue to fall over the coming year down to a record low of 2%. It currently stands at 2.75%.
The Westpac economists have for some time now been forecasting a low point of 2% of the OCR and were officially joined in this belief by ASB economists last week. The RBNZ has indicated - though not explicitly - that it sees a likely low point of 2.5% for the RBNZ.
42 Comments
OK, it appears that Auckland house prices and related economic activity have relatively benign impacts on the CPI (but tobacco has enough to be mentioned). Isn't that wonderful. Low inflation, cheap debt, and skyrocketing house prices. Doesn't sound particularly healthy to me, but what would I know.
Actually Steven, house prices in most regions are still generally rising, just not at the rate that AK is. And CPI (Consumer Prise Index) is supposedly and indication of the impact on pay packets, i.e. cost of living. Housing costs are a significant impact either directly or indirectly so should be included. Without the inclusion 1% is essentially meaningless.
CPI relates to consumption not asset prices. Including assets (e.g. shares, real estate etc) would factor in the capitalized value of future consumption and would make the CPI a mixture of consumption at different times. This is not suitable for comparing the price of consumption bundles at distinct times so as to get an accurate reflection of price movement.
To see the basket of goods and services currently in the CPI see: http://www.stats.govt.nz/~/media/Statistics/browse-categories/economic-…
Right and wrong. CPI is an index of the price level of goods and services. Housing is a consumed as either a good or a service and housing costs are included in the Excel chart. Housing costs are distinctive from the price of a house, but there should some kind of impact on housing costs, either through rents or through the cost of entering the housing market.
But my point remains: house prices can go nuts in AKL yet the CPI is barely affected.
but a house is not consumed, it isnt an apple. Housing operating costs are I think included in CPI? as is rent?
if you look at core inflation its 0.3%,
http://www.tradingeconomics.com/new-zealand/core-inflation-rate
"go nuts" indeed, or sort of as our un-employment has creeped up to 6%,
http://www.tradingeconomics.com/new-zealand/unemployment-rate
and the tradables is in the -2% range.
Yes we really are dong so well.
I very much do not agree with you on including housing in the CPI mainy because if we were to that would raise the OCR and kill the sectors providing goods and jobs.
Also when food goes up, my and pretty much everyone's pay packet is impacted. My house has however gone up 3 times in value and my pay packet is not impacted at all.
If you look at the regions I think its all <5% and some are even negative?
The 1% is not meaningless, it tells you how sick our economy is and frankly deleteriously so IMHO.
I think you're missing the point. If I am sitting on a massive capital gain on an Auckland property and inflation is low, yes, I would be pretty chuffed.
OTOH, if I were a younger NZer saving to purchase a house in Auckland, how do you think inflation is perceived, particularly as it relates to consumption of a home? Remember, housing costs are the largest cost in most people's expenditure.
The idea that a house is a "financial" asset also confounds the situation.
I know that house prices are not explicitly expressed through the CPI. I am simply pointing out the irony of the situation.
Steven I see your point, but don't agree. New construction homes are on the list, but not existing. And I don't think the point is "consumed", it will be what a consumer purchases instead. Many but not all consumers purchase a home, those who don't will pay rent (which is on the list). Mortgage costs, rates, insurance etc will equate to rent. If a newly constructed dwelling is on the list why isn't an existing one? The same argument could be applied to vehicles.
Fair enough. Just one thing, what do you want the CPI to tell you? For me and I think most (all?) economists its the bellwether on the state of the economy. Though I actually prefer core inflation which takes out energy, which you will probably hate that even more ;]
So the OCR has an effect on many aspects of the economy, ergo its critical not to have it too high or too low, however its also a broad based tool, not a surgical knife.
new v old, yes its not a perfect system, however trying to cover everything exactly is impossible.
Also consider the demographic aspects. 50+ and OAPs v 20 somethings. Technology wise the younger generation use a huge amount of telecoms which is getting cheaper v us older ppl. So there are many swings and roundabouts.
Also of course noise, I remember Wolly commentiing some years back that tomatoes in winter were $19 a kilo!!!! we have huge inflation!!!!! Come summer <$4 a kilo, so we have a Great Depression now? think not.
"what do you want the CPI to tell you?" that is the million dollar question isn't it? As people grow and become more aware the CPI has been thrown at us from various directions and used by the pollies to justify their positions on occasion and ignored on others. I was surprised at the level of detail in the listing, but figure that level or more is required. Stats - the greater the sample the less the error. I suggest that the CPI needs to be adjusted for changing times; the current housing crisis means that accommodation is taking a significantly larger portion of peoples pay packets which ever way it impacts on us, and thus all aspects of it should be considered. Yes house prices are very much out of kilter with other parts of the economy, but that also means their impact is that much more significant. If we are to be provided information, let it be as accurate and transparent as possible. But at the end of the day the CPI is a pretty crude tool that tries to apply the same sized brush to the whole country, somewhere will always find it inaccurate in some way. Perhaps an ability to manipulate it to reflect local influences would be possible?
Ok, so consider that as housing takes a bigger % of ppls pay packets, what happens when ppl lose their jobs due to a recession caused by the OCR being too high? they have no pay packet as such and hence lose their home.
I dont think the OCR can ever be used localised, I think we need a complimentary tool or maybe 2. Of course its not just localised / housing its also about manufacturing. As an example if we hammer Auckland with a localised high OCR across Auckland we also hammer a large % of the employers in that area, sending un-employmnet up I think that is a bad idea.
I also don't think a localised OCR will be useful, although a localised CPI might be. Therein lies the quandary. Scary thing for me is that as I get older and see the impacts of capitalism, I am moving towards the left. So taking your example if we expect employers to pay a living wage, what would that be in AK versus say New Plymouth, or Whanganui, or Patea? I actually don't believe that many if any employer could afford to pay a living wage in AK or some of the other centres. And this tends to reinforce a growing belief of mine that the true centre requires a level of Government regulation to limit rampant capitalism whilst not building too much dependency.
And therein lies another paradox(?) this country maintains a comparatively high level of dependency through social welfare, but is the current Government also creating a level of Corporate dependency through failing to regulate capitalism and thus when it finally has to, or some degree of collapse occurs that drives towards a rebalancing will the socialism be towards bailing out the Corporates who have not allowed for the downside? This happened in the US after the GFC, as it was the Banks bailed out, not the people who lost their shirts because of the banks. Perhaps Bernanke's helicopter approach would have been more useful?
but I dont pay rent, and my mortgage is getting cheaper, about 7% I think. ie the CPI and OCR is a macro policy tool.
As some examples. Many younger ppl / heavy telecoms users have seen some substantial cost decreases. As a personal example I now pay $140 a month for 100mbit/sec unlimited download broadband where 2 years ago I was paying $200+ for 150gb download and paying for extra. So I am saving around $70 per month. My wife's mobile phone plan was $40 from Vodafone its now $29 from 2degrees, a 25%+ saving for 3 times the data and 2+ times the call minutes. These savings have more than compensated for the power increases I have "suffered" and the insurance increases.
So just consider that there are swings and roundabouts...
The RBNZ needs to cut interest rates to try to achieve their official target of 2% inflation.
Currently inflation is about .3 or .4%
However, they are not allowed under the world order as NZ has a specific role as a food commodity, high interest rate country.
The Govt also needs to Increase govt spending on infrastructure, hospitals, schools, universities, roads etc, which is a kind of socially useful QE that does not put money into passive investors hands.
That's quite a bizarre perspective:
1. NZ has a "global responsibility" to be have high interest rates. I say that is garbage. Our interest rates are high because primarily because of our current account deficit. Would you not agree?
2. Re Keynesian policies, govt spending puts money into the private sector's hands, except that we run a high current account deficit. We're not Japan.
The Govn can and does borrow. It already borrows above the OCR I believe, 3.2% for 10 years v 2.75%.
The interesting thing is what is happening right now, 90days has fallen off a cliff,
http://www.anz.co.nz/about-us/economic-markets-research/interest-rate-g…
Who do you think influences the RBNZ? They answer to global entities beyond the NZ Govt.
who benefits from our high interest rate policy? Offshore private/corporate investment entities & banks. We are setup for them.
Govt underfunding of Universities, for example, dictates that the tertiary sector expand their private marketing/private agencies to recruit the 110,000 international students which fund the govt shortfall. Who benefits? The private sector. Look at the 100s of PTEs joining the Sector (Queen St).
My theory is that, for some time, the agencies that do so have been finding new an creative ways of expressing poor data in such a way as it can appear positive for the politicians to present. For example, in the seventies unemployed was if you did not work a full week every week. Now 1 day of unpaid work in a fortnight will count as employed. Financial reporting is also affected.
But the limit has been reached, there is no more fudging of numbers possible so there cannot be shown to be an improvement on the previous reading.
@Steven, a house (dwelling) is consumed, not like an apple, more like a car, it wears from use (depreciates) and parts or all of it needs to be replaced or refurbished to restore functionality. You may be confusing it with the land (property) it sits on, which is the core asset, the part which appreciates in value.
No a house not like a car, and no I am not confused. A car clearly depreciates over 20 odd years to zero, a house can last 100 years easily and appreciates at least at the rate of inflation, in effect due to its long life its passing is moot.
By that as it may the thing about inflation is it singles the state of the economy, so putting up the OCR as we just proved here in NZ weakens the economy, ie the last thing we want to do is trigger a recession.
Not sure on your claims on how un-employment is measured by stats NZ, but again that was 45 years ago so doesnt really mater for a period of say the last 10 which does.
--edit-- also much of NZ is not seeing significant house price inflation and some is losing.
--2nd edit-- A a pointer, I bought a car brand new in 1996 so its 19 years old and near the end of its life, worth maybe $500. My house I bought in 1997 and its tripled in value.
Its' not the house that increases in value.. ( unless money is spent on continual renovations)...
It's the Land value that is the appreciating component.
I can't see why u can't compare a car to a house.... both are consumed..
i agree with spinach.
The whole point of the CPI in regards to Central Banks , is to manage the Money supply so that price stability is maintained and the purchasing power of money is stable.
GFC has shown that there is a disconnect between the CPI and the effects of increased money supply... ie. inflation targeting is a very flawed way to manage how much new money it is sensible to allow to be created.... in my view..
As things stand, the GFC has shown that the current form of Monetary policy focus on inflation targeting actually results in financial instability...
Unfettered credit growth that finds its way into ( at the moment ) speculative asset investing...
The reserve Bank lowering of the OCR ( which most people r screaming for ) simply results in more credit growth... more debt.... as NZ moves slowing towards its' own meeting with Financial instability.... ( maybe in 10 yrs time..??? )
agree, that's where the rising house prices five times the rate of inflation hurt the economy.
new buyers can not get in so more and more of there consumable spend goes in rent, if you cut the OCR do landlords pass it on or even a piece of it, not very likely.
as for those that can buy they are leveraging up so not much left to spend in the shops.
so that leaves those that have owned for quite a few years and the oldies to take up the spending slack. but with interest at an all time low they are not getting the income to splash out.
In the end booming house prices will not help with spending and kick the economy along.
Yes, and it goes on. After the tribute of interest payments is paid out to overseas money lenders there is not enough financial capital to spend on physical and intellectual capital, eg roads, railways, hospitals, research and development, plant and equipment, so that must be borrowed too. We are a heavily indebted country effectively mortgaged to the hilt. There is no plan to change this, just a lot of dopey people pretending it will be ok.
If houses drop then that would probably not be in isolation and would be from an external event(s), so I'd expect that the RB would drop. The only way the OCR should rise to me is when we have inflation clearly going past 2% and un-employment clearly going below 5%.
if the government cut back on immigration you would get wage inflation and a reduction in unemployment and most likely a leveling off of house inflation.
will they do that ? NO
why not? follow the money
who does it benefit from current policy settings ,
do the negatives out weight the positives
Finance Minister Bill English says soaring migration is "the right kind of problem to have"
The CPI measure is meaningless. Housing related costs have been increasing at enormous rates for the past 10 years. Wages haven't. The average retailer out there is under huge pressure to control costs, discount and keep prices down to compete not only with internet shopping, but consumers ever decreasing discretionary income.
The RBNZ would be far more prudent to take a look at housing inflation. Reigning in all housing related costs, especially councils, utilities, RE agents, banks and the like. All of which contribute to the inflationary cost of a non productive asset.
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