ASB economists are calling it a 'Costpocalypse', while BNZ economists say they are raising their inflation forecasts on an almost daily basis and say a number in excess of 8% for annual inflation is not out of the question.
BNZ head of research Stephen Toplis in BNZ's latest Markets Outlook says there is "now almost no doubt" annual CPI inflation will surge through 7.0%.
"We have recently raised our expectation for [March quarter 2022] CPI to 2.0%, taking the annual increase to 7.2%. The annual reading is expected to climb even higher to 7.6% in the June Quarter."
ANZ last week moved their inflation forecast up to 7.4% for the June quarter, while ASB are also now seeing 7.4% for the June quarter.
In its February Monetary Policy Statement the Reserve Bank (RBNZ) was forecasting 6.6% annual inflation as of the March quarter, reducing to 6.3% by June. Those forecasts were finalised, however before Putin's invasion of Ukraine.
Toplis notes that the last time we experienced this kind of inflation was in 1990 just as the then “new” inflation targeting regime was being implemented.
"A number in excess of 8.0% [for annual inflation] is not out of the question. It seems we are raising our inflation forecasts on an almost daily basis as oil prices surge, food prices defy expectations and generalised cost pressures feed through into selling prices."
ASB chief economist Nick Tuffley in ASB's Economic Weekly publication said: "Call it a crisis, challenge, or a mere Costpocalypse, but the cost of living keeps soaring."
He noted that oil prices "bounced around" last week on Russian-Ukrainian developments. "But the fuel pump price is higher still..."
"...At the peak (in the June quarter), we estimate the CPI will show around a 45% annual lift in petrol prices, with fuel prices accounting for nearly 2 percentage points of an estimated 7.4% headline inflation rate.
"In February, food prices rose 6.8% from a year earlier, the fastest pace of food price inflation in over a decade. Within that, fresh produce prices jumped 17%. Retail grain and dairy prices are likely to come under further upward pressure this year."
ANZ's economists last week made a new call on their expectations for the Official Cash Rate. They now expect the RBNZ will lift the OCR by 50 basis points at each of its next two reviews, meaning the OCR would be doubled from the current 1% to 2% by the end of May.
BNZ's Toplis says in this environment it is "tempting" to push expectations for Reserve Bank rate hikes in line with the surge in inflation.
"The market has certainly done this with a 70% chance of a 50 basis point hike now priced in for the April MPC meeting and 85 basis points of hikes priced between now and May."
On a strict "model-driven forecast" the RBNZ would appear to be, Toplis says, "so far behind the curve it’s not funny, and one could justify any number of aggressive rate hikes".
But he says it’s not a one way bet that a 50bp rise will or should be delivered in April. And he cites the following "numerous factors" that will weigh on RBNZ minds:
► In April we will still be seeing the peak effects from the current Omicron outbreak, which is well and truly shutting down New Zealand at the moment.
► There is little key data between now and the April meeting and what data there is, will likely suggest that while inflation pressures are rising, economic growth is vulnerable
► May is the next MPS and would seem to be a better time to go 50bp. We will then have the next CPI report, the next labour market report and have a better idea of how the economy will be bouncing back from Omicron.
► Consumer confidence is currently plummeting. It’s even below GFC levels.
► Retail spending is falling rapidly.
► House prices are falling. They will fall further.
► Surging petrol prices are destroying real disposable incomes (and, hence, consumer spending). But no one knows how long elevated prices will last. Indeed, at some point in time there is bound to be a significant commodity price correction which will prove to be broadly deflationary.
► The war in the Ukraine is adding to uncertainty at a time when Omicron is already creating bucketloads. The RBNZ doesn’t like going big when uncertainty is prevalent. Given recent past comment its consistency would be questioned were it to do so.
Toplis says even if an April 50bp rise "does become saleable" [the next RBNZ review is April 13], he thinks it’s too early to make that call now.
"We’ll be keeping a close eye on domestic developments (Omicron and house prices) and Russia/Ukraine to see how things evolve before talking that step."
Toplis notes that the vast majority of the CPI increase can be put down to surging global oil prices.
"But the more important question is where will they go from here and, in the interim, how much of this increase will feed into more generalised CPI inflation. While all the near-term pressure is upward there will come a time when the upside risks are fully priced.
"Moreover, any sign the war in the Ukraine is about to end could bring about a very sharp drop in prices. The impact of this could be substantial, it’s just that we don’t know when. To put this in perspective, however, even if we assume a modest drop in pump petrol prices from current levels, say 10% by the end of the year, then by late 2023 annual headline inflation could well be below the RBNZ’s target band."
50 Comments
Was speaking to a Boomer couple which are selling one of their rental properties on my street [Christchurch]. They believe prices won't go down and cashed-up, returning Kiwi's will bolster the market.
Their first accepted offer fell through - apparently the second offer is a go.. but no 'sold sign' as of yet. Their property has been on the market for a few months. They seemed nice enough, though in my head I did questioned their magical thinking.
If interest rates stay low and the credit tap is turned back on; they could actually be proven right - in strictly NZ Dollars terms anyway.
Someone I know (late 50's) at the beginning of Covid was looking to sell up the rental + house and buy elsewhere to retire. The bank convinced him to leverage off both, and take out a mortgage to buy his retirement home.
I said to him "what happens if the market turns, interest rates go up, migration falls etc". "You can't prevent your tenants from becoming FHB".
He said he'd just sell up.
Told him it's easier said than done, in a rising market there are no shortage of buyers but in a falling market there are no shortage of sellers. Will also be in a rude shock when his $1.5m of mortgages go from rates starting with a 2 to rates starting with a 4.
If prices going up 30% in a year while people couldn't work and the country was in lockdown while central banks and governments pumped stimulus into it....wasn't a crack-up boom....well I guess the next leg is up 50-100% in a year after the RBNZ completely loses control. If that is true, it is the end of society as we know it/have known it.
I know people like to dismiss you xing but I tend to agree. The US is in serious decline (all of Ray Dalio's datasets point towards it). Most people assume the past they have experienced in their lifetimes is going to be representative of the future - for boomers, that is one which is clearly dictated by a powerful USA, meaning relative peace and security for NZ as a 5 eyes partner. That could all crumble in coming years, especially given our reliance on Chinese trade.
I think its just as likely, if not more, that the future is directed by a powerful China, and perhaps not so much the US or the west as we have known.
Xing - will China use this power wisely?
Not sure if you follow Ray Dalio. If not have a look at his charts on global powers based upon data points including education, economic, military, technology, health....(many more). Goes back 500 years.
China now rising and overtaking US which peaked in the post WW2 period and has been in a slow decline since.
The outcome of the current conflict in Ukraine and a world-wide recession might be the final tipping point that will see China being the country everyone turns to in order to resolve the crisis. If so, China wears the big boy pants from there on in and would likely have the power to negotiate the end of the US as global reserve currency. In the interim, the US will continue to devalue the currency in order to avoid defaulting on its trillions of dollars of national debt.
This follows a pretty consistent cycle in terms of world powers rising and falling. The US has had a pretty good run and appears set to expire. The US rose to world power status around 1850, perhaps after their civil war, but lived in the shadow of the UK until the early 1900's - at which point the UK was declining in the same manner as the US is now (trying to influence the world but no longer able to do so economically or militarily).
Innovation and technology is one of the datapoints used in determining which country is rising and which is falling. Combined with the other datapoints, the future looks more prosperous in China than the US.
Again this is based upon research as opposed to 'i reckons'.
Have a read of the book "Changing World Order" if you think you know more. It might be a good read for you.
Have a read of his book 'The Changing World Order'. Its backed by research with interaction with experts in history and finance.
If you disagree that is fine. Although there tends to be an attitude of down looking in the west towards the extent of China's rise. More perhaps that we don't want it to happen, than acknowledging what is actually happening around us. Dalio gets called a traitor etc in the US for having these views...despite just taking datapoint and making those view from the datapoints public.
That is his job....to assess risk.
But if you talk about risk you get labelled a DGM because we have built a society that thinks everything should be 'nice' and thinking about possible negative outcomes make you a gloomy personality.
As opposed to assessing the risk and making plans for it.
The Chinese overblown Building them and weep EverGrande hyperboly is way more screwed than one would appear....but then I print the Truth...when I write things on this site....
Knowing write from wrong is just like Russia......keep em in the Dark, spin the bull crap and pretend our Leaders all know what they are doing......EH' Mr Putin......Lies, lies and bull crap, does not an intell-i-gent Leader make. But 2 of a kind is what XI and Putin have in common......not an ounce of Common Sense......What a great team.....they will be.....Lords of all they purvey, till the end of Time. Cos they said....so.
And their populations believe em....Duh!.
If the World is judged by the two so-called Best Leaders in holding positions of grandeur.......2022.....then we are stuffed.....2023 and beyond.
An end of an era.....or two...praise be.
If this 100bs change doesn't happen, Mr Orr is clearly avoiding doing his job about inflation in order to protect the everything bubble. It would highlight what a farce the Central Banking model really is. Shameful. As is the Govt's inaction to allow this farce to continue and continued stance of "be nice"...
You already know the answer, Orr is already avoiding doing his job there is no more "Wait and Watch" the last rise should have been 0.5%. The next rise will now need to be 1% and everyone knows it. Actual Inflation is now in double digits, its at least 15% and still climbing. Massive overshoot coming as there is no attempt to correct it. Get used to $4 a liter petrol, its coming to a pump near you.
He's got 12 months to go on his 5 year fixed term contract.
All eyes are on the Government at the moment as it's a "cost of living crisis", so he's going to just tinker away with the OCR and hopefully fake it until he makes it in 12 months time.
The beauty is people who don't fully understand what the OCR is assume that it's another type of tax, so when they see it only go up 0.25% they go right back to their ignorant flaming of the Government for "taking 52% of the pump price in tax" even though the percentage of tax has been falling.
16 march 2020 the OCR cutt 0.75 -- CPI around 1.5
In last six months (October to March) the OCR raise 0.75 -- CPI around 6
Labour and RBNZ cheif is not serious about inflation at all, they are playing with kiwis sentiments because they fooled and got all the votes in name of controlling house price and inflation.
Jacinda and Orr should pass on the power to someone who can control it, 5 years is a long time (from 2017).
It's all about protecting the debt bubble - everything else is an attempt to mislead the public into believing otherwise. Central banks can't afford for this inflation to exist because it is going to blow apart everything they have been doing and saying post 2008. They will be praying that something outside their control happens that brings about recession and they can use as an excuse ....'see we didn't do that....xxx did'.
In this case the finger will be pointed at Russia - even though inflation was exploding before Ukraine happened.
Just like how the 2/10 inverted in 2019 before COVID....indicating recession was imminent. But great excuse to print endless amounts of stimulus.
Remember folks, how are OCR increases supposed to reduce inflation?
By... reducing disposable incomes, which reduces consumer confidence and spending, which reduces demand in the economy, which increases unemployment, which reduces demand further. Apparently all of this reduced demand will persuade businesses to reduce their prices, and force workers to accept lower wages, thus reducing inflation.
Do increased oil prices achieve exactly the same thing - increasing the prices of loads of things and reducing disposable incomes? Is it perhaps a little odd that Government is about to spend $400m on fuel tax and cheaper public transport to protect disposable incomes, whilst everyone is shouting at RBNZ to increase OCR to reduce disposable incomes? Madness.
Well I'm a saver so it's in my best interest for OCR to increase - protect my money from being eroded by inflation. I have no debts so not worried about that.
Surely that's a big reason though for the OCR to increase. Money is just an abstract thing these days so you better make it rewarding to have and to hold otherwise it's quickly going to lose its value, or in other words, huge inflation. While people hoard things that they do perceive to hold value, like fuel, vegetables, gold, houses, crypto... whatever.
Reserve Bank Paradox isn't it? They where keen to cut the OCR and promote inflation but reticent and full of excuses when it came to increasing the OCR to keep CPI within target.
Much as to say if they didn't increase the OCR substantially last time I don't see why they would this time.
Just as well the CPI has been manipulated over the years since the 80s to reduce it's value by 50%.
Imagine what would be going on if it was still calculated in a meaningful way that reflected reality; it would be full on panic mode.
What a mess these people have created by introducing a flawed economic model and then manipulating everything to make it work to serve the elite and cover all the faults.
Sadly, the people are going to pay for it, not the rich.
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