It will, in the words of one economist, be a "monster".
Statistics New Zealand is set to release Consumers Price Index (AKA inflation) figures for the March 2022 quarter on Thursday, April 21.
The 'headline' number will be a big one. Economists reckon it will have a '7' in front of it.
To give some historical perspective, it will be the first time New Zealand has seen annual inflation of over 7% since 1990. And if one chooses to discount previous spikes in inflation that were contributed to by either the introduction of, or increase in, GST, then we have to go back to 1986 for the last time we had inflation of this magnitude.
Yes, 36 years. A lot of us were not born then. (I was and I don't remember inflation fondly.)
And while the hope will be that this 7%+ figure proves to be the peak, there can be no certainty.
Go back less than 12 months and nobody was predicting inflation to get to anything like these levels. Economists have been writing up, then rubbing out, then re-writing projected inflation figures frantically. The annual inflation figure as of December, 2021, was 5.9%, which was up from 4.9% in September, 3.3% in June and just 1.5% in March 2021. What a difference a year makes.
Bear in mind that our central bank the Reserve Bank (RBNZ) is charged with keeping inflation in a 1% to 3% range, explicitly targeting a 2% level. Its main weapon in doing so is by influencing interest rates through either raising or dropping the level of the Official Cash Rate (OCR). After the onset of Covid in early 2020 the RBNZ dropped the OCR to an emergency setting of 0.25%. Since October, in the face of the emerging inflation pressures, it has now raised it to 1.5% - with much more to come this year.
Truth is, the world has been hit by one (inflationary) shock after another. There was the pandemic, which led to massive monetary stimulus being pumped, then there were the big supply chain disruptions, an emerging oil shock, then Putin decided to start a war in Ukraine, which supercharged the oil shock, and so on.
Ultimately the key to whether the surge in prices we've seen starts to become more permanent lies within that amorphous thing known as 'inflation expectations'.
After the horrors of galloping inflation in the 1970s and 80s the world made a good job of removing inflation expectations. Put simply, people stopped expecting prices to rise so they weren't putting their prices up in anticipation, or they weren't demanding big salary increases to compensate for what they thought would be rising prices.
Unfortunately in New Zealand, various measures of inflation expectations, including the Reserve Bank's own survey, have shown that people are now once again expecting future prices to be higher. If that mindset locks in then we could get into a wage and price spiral that will be difficult to extricate ourselves from.
That's why the RBNZ is making efforts to get on top of the surge, doubling up in its last interest rate review on April 13 with a 50 basis-point hike to the OCR. By acting decisively now, it hopes to dampen those inflation expectations. Will it succeed? It might have a job on its hands. It took a long time all those years ago to deaden inflation expectations. It may take a while again. We shall see.
But that's for the future. For the present there will be the details of the March quarter 2022 inflation data to digest.
Key components are expected to include fuel and transport. The Government has of course temporarily cut fuel taxes, but the main impact of that reduction in terms of the inflation figures is not likely to be seen till the second quarter of the year.
Other 'culprits' in the surging prices include housing-related and construction costs, food, alcohol and tobacco.
Things such as fuel prices cause 'tradeable' inflation, that is, imported - and over which we don't have much control. The more key component of inflation is the so-called 'non-tradeable' inflation, which is rising prices that are generated domestically.
ANZ economist Finn Robinson and chief economist Sharon Zollner - who are picking a 2.2% quarterly rise in inflation, and 7.4% annual figure, say the exact breakdown of first-quarter inflation "is pretty uncertain".
"And given that Q1 saw the Omicron wave peak, and global commodity prices surge in the wake of the Russian invasion, it’s very possible that tradables (ie imported) inflation comes in even hotter than the 8.9% year-on-year print we’ve pencilled in (vs 6.9% in Q4)," they say.
"For what it’s worth, the current trend globally is for inflation to beat analyst estimates. In an environment where inflation expectations are becoming dangerously elevated, an upward surprise would only increase the risk of expectations becoming unanchored from the RBNZ’s 2% target midpoint. But most important for the RBNZ will be the core inflation pulse. In the December quarter, all the key measures of core inflation were above the RBNZ’s 1-3% target range for annual CPI inflation – even the slow-moving sectoral factor model. We’re forecasting that non-tradables (ie domestic) inflation accelerated to 6.5% in Q1 from 5.3% previously, highlighting just how much of the inflation pulse is being generated by domestic sources."
Robinson and Zollner say rising inflation expectations and an extremely tight Kiwi labour market create their own feedback loop of rising prices – supported by the very strong starting point for domestic inflation pressures.
"That speaks to the RBNZ needing to hike interest rates aggressively over this year to get ahead of the inflation curve."
ASB senior economist Mark Smith is picking an annual inflation figure of 7.3% as of the March quarter.
"...Annual CPI inflation is expected to remain elevated over 2022 and remain outside the 1-3% target range until probably 2024," he says
The inflation "horse" has, he says, "bolted".
"A steady stream of price and cost rises from a multitude of domestic and external sources has resulted in ASB Economics (and the RBNZ) almost continuously revising up our forecasts for NZ inflation."
He says the big issue is not so much what the inflation peak will be but how persistent the uptick in inflation is.
"The RBNZ has acknowledged that risks to near-term inflation are skewed to the upside but seems confident medium term inflation is still aligned with the 1-3% inflation target. However, we are not so sure."
Smith says high readings for core inflation and increasingly widespread price increases would highlight the possibility of high inflation outcomes being more persistent, "with the RBNZ still behind the curve".
He sees annual CPI inflation ending 2022 at above 6%, and not moving under 3% until mid-2024.
Westpac senior economist Satish Ranchhod - who describes the forthcoming March quarter inflation figure as being "set to be another monster" - is forecasting annual inflation of 7.0%.
"Much of the rise in consumer prices seen in recent months is a result of high international oil prices. There have also been large increases in the prices for fresh produce and other food products," he says.
"But the high level of inflation isn’t just due to a few specific items.
"Price pressures are bubbling over in every corner of the economy, boosted by a potent cocktail of supply-side cost pressures and firm consumer demand."
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95 Comments
Try this - We are going to see a 0.5% increase in the OCR, again, next month. Why, because my technical strategic mapping system seems to be correct. Carlos67 said it was going to be 25bps for the April review, so I just said it will therefore be 50bps, we all know how that turned out. - by atknz | 11th Apr 22, 4:29pm
Calling it for just 25 basis points with OCR this meeting and for next meeting then it will stop - fixed rates may still increase with swaps.
People like atknz have Vested Interests and say silly things. So its easy, just predict the opposite of atknz. 50bps for April (confirmed). 50bps for May. And it will NOT stop. Easy.
You are pretty funny 2022. I have vested interests in the OCR going to 10% so really don't care what the rise is, all that people need to know is that they are facing rises and not falls in interest rates. There must now be an outside chance of even a 75bps rise at the next review as inflation could even start with an "8" before then but either way it has little impact on me.
I hope the OCR does work in your favour Carlos. At 10% im not sure who would be investing in property, no tenants, no maintenance, no mortgage payments or increases to worry about, no rental company fees, no new WOF and other laws to meet. Just collect the interest on your term deposit. Lets just hope there are no bank runs from the mortgagee sales.
One is even less sustainable than the other.
Operating a profitable business in a properly competitive market is no mean feat, to me this seems like it too has been held afloat by cheap money.
Sometimes it's nice to not bring every topic back to the housing market.
Thank you for using the words "Blatantly Obvious" in regards to interest rates going to 7 and ( UP ).
Others here have struggled to except this, and some still wont.
To them I say 7 ...... Up Yours.
Correct, 7% is too low. Let's be realistic here, mortgage rates must be higher than inflation rate to kill the inflation Genie. It's pure Roger nomics 101. Back then we had a credible finance minister and a credible RBNZ governor. The fat guy and the dumb guy obviously didn't study this when they went to Uni.
The 4th labour govt 1984-1990 restructured NZ.
The 5th labour govt 1999-2008 reaped the rewards and reduced Debt
The 6th labour govt 2017-2023 replaced economic management with a well-being budget and not a balanced budget in sight from the fat man. History will just this governments economic management as completely absurd and dangerous to NZ financial survival.
12% inflation by end of 2022
House prices will collapse 70% in unadjusted inflation terms. All this by 2025
Then again, history will look at the absurd stupidity of housing, economic, tax and monetary policy over the last few successive governments, the silly idea of pumping property for an unreal "wealth effect" that's only transferring wealth from some to others, and the unwillingness of investors to pay their fair share of tax.
That's what has caused the growth of the housing debt bubble, then bailed out with massive QE instead of adequate fiscal stimulus during the hard times.
A problem built of Entitlement Mentality, played out over the last 25 years.
Fresh off the Press.
New Zealand Home Price Falls Accelerate!
Still blows my mind that even a hint of possible deflation back in 2020 resulted in all sorts of emergency monetary and fiscal intervention…but we can happily have inflation waaay outside the targets on the high side and it’s a very cautious slowly does it approach.
The fear of course is that deflation would immediately destroy the massive debt bubble that central bankers have created over the last 20 years.
And even more oddly, their inability to control imported inflation could do the same. While we used imported deflation to create the mess in the first place and used those deflationary pressures to push interest/mortgage rates to zero creating very large asset/share/housing bubbles.
If it does all come crashing down, it will look very foolish in hindsight.
Absolutely. And yet the media describes RBNZs actions as "decisive" because the OCR was raised by a piddling 50 basis points.
Inflation is getting hold, and real rates are still being kept deeply, deeply negative. An inflationary train wreck is coming and they won't be able to save their precious debt bubble no matter how desperately they try.
The Mortgage interest rates are going 7 (and UP) .
I bet you can't guess my favourite Drink ? That's all there is in my fridge, nothing else. I like to kick back at night and sip away, with a big bowl of popcorn of course, extra butter.
https://www.youtube.com/watch?v=-xBlsE2w4BU
China's latest round of lockdowns are also inflationary for NZ. It is currently estimated that around 390 million people across 45 cities are in partial or full lockdowns in China. That is inflationary for many countries outside of China. Imagine if China ends up invading Taiwan, that would be a huge inflationary shock for the global economy. It is a risk that can not be discounted yet. You really do have to wonder what other inflationary curve balls could be on the horizon. Let's hope we don't get any more but given the current run we have had we have to be ready for more. Is it a coincidence that both China and Russia continue to create inflationary forces that are impacting many western countries? I don't think so.
Is it a coincidence that both China and Russia continue to create inflationary forces that are impacting many western countries? I don't think so.
The Northern Hemisphere approach - Send weapons to Ukraine to prevent world famine, German minister suggests
NATO needs to grow a pair , the world has nothing to lose confronting Putin now quaking to his demands will not appease him it will only make matters worse, I no more than anybody else wants to see a world war let alone a nuclear one but don't expect a tyrant to be rational.
No. This latest lockdown is an own goal for China.
https://www.afr.com/world/asia/don-t-raise-interest-rates-china-s-xi-te…
Hmmmm..
Since COVID-19 began, the US launched a budgetary stimulus of $900 billion in December 2020, and $1.9 trillion in March 2021 - $2.8 trillion in total. The US government borrowing peaked at 27 percent of GDP and US money supply increased by 27 percent year on year - both the highest in US peacetime history. Structurally, these packages completely focused on consumption - on the economy's demand side. From 2019-21, 98 percent of increase in US GDP was in consumption and only 2 percent in net investment. With a huge demand increase, and almost no increase in supply and investment, inevitably a huge US inflationary wave was ignited. As the Wall Street Journal put it, "This inflation was made in Washington, D.C." Link
I was managing a branch of a national rural supply store in the early eighties and I can distinctly recall being instructed not to quote prices beyond the next day all quotes had a 24hr limit on them . Watching what is happening now regarding prices brings that to mind also at the time I was paying 22% on my house mortgage. I think the reserve bank is so far behind the horse it released it couldn't see it with binoculars. I can't see how the reserve bank believes it can rein this in with a couple of half point increases. Wild optimism at best willful blindness at worst .
Agree. I guess one of the few things on the RBNZ’s side, is that sooo many kiwis have had their mortgages on very short term fixed rates. The RBNZ can have a fairly quick reaction because of this.
If this goes on for a while I’m guessing they’ll lose this as we will fix for longer terms.
Yes there was a thread/conspiracy theory I was reading on twitter that there could be a behind closed doors agreement going on between China and Russia with the aim of causing as much damage as possible to western economies.
Russia while gaining territory in Ukraine will also cause significant imported inflation in food and energy prices.
China, by locking their country down due COVID, will cause significant supply chain issues for imported manufactured goods.
Inflation is the enemy of western economies loaded up with debt who can't sustain higher interest rates.
Makes sense, but could just be completely unrelated.
Yes I mostly agree...but I guess they have more to gain and less to lose that the current world power who is looking more and more fragile. If they can severely cripple the USD, then they might call it a win in the longer term, even if they domestically take a hit at the same time. All hypothetical of course....
Why would anyone assume that China or Russia would fair better in a high inflation environment than anywhere else?
The entire world’s economies are enmeshed in the same debt fuelled, currency devaluation, shadow banking Behemoth. If that all collapses (and it would always have done eventually) then everyone disappears down that sink hole.
Question is, how will the various economies fair in the sink hole? How will the populace cope in that crisis?
Great point, and I far prefer this to IO's (a guy I usually rate highly in his comments).
I don't see China as being in a better position than the USA, in fact I see the reverse (but only marginally).
I actually don't see the prospects looking good for anyone. And it's all coming back to math, really.
Thank you for the compliment HM - just a conspiracy theory...nothing more...although economic attacks on the world reserve currency holder when it appears weak is nothing new in the history of the world order - even if they mean suffering for the domestic economy by countries with ambitions for greater global influence.
Hi Ginger..yes I agree.
"Why would anyone assume that China or Russia would fair better in a high inflation environment than anywhere else?"
I don't make that assumption...its all about who has the most to lose (as you point to in your last sentence)...and if you study the history of the global world order, its usually the dominant world power holding the reserve currency (currently the US).
Damaging the USD dominance (in any form) might be viewed as a win by Russia (and perhaps China...and perhaps not). Perhaps not by the people of those countries - but perhaps by the leadership with global ambitions. Its like taking down the bully at school - you might get a black eye or two in the process. But so might he and when everyone can see his weakness, he is no longer the person he was prior to being challenged.
One thing to note, is that as soon as a reserve currency begins money printing, like the US has, it is the beginning of the end as it over extends itself. The expense of maintaining a global military to enforce its dominance becomes too costly to maintain and eventually the debt burden cripples the country and causes internal chaos as to who/how to fund that debt (working my way through Dalio's 'Changing World Order' at present that discusses this in detail).
Just a theory - happy that it could be complete nonsense..but i guess time will tell as nations show their true intentions (like any other period in history when international relations decay).
"and commentators speculating interest rates could hit 7 per cent very soon"
https://www.stuff.co.nz/opinion/300566646/hello-buyers-market-goodbye-s…
Who are these crazy people ?
Many still believe (wishfully), that a soft landing can still be achieved, I don't think so.
Inflation is much too high to ignore, interest rates have to rise further.
Debt is much too high to be coping with rising interest rates.
A recession by Q4 2022 is the best we can hope for, I hope it doesn't get uglier than that.
Agree. Soft landings only postpone hard landings. Economics aside - what is needed is a psychological reset in the west to living within ones means and focusing on what really matters. The medicine will be taken eventually whether we like it or not, so might as well collectively hold our noses and open wide..
A gentleman never asks and a lady never tells. How about this: I'm old enough to have been slugged for costs previous generations weren't, but young enough that my transferable skills are still worth a lot more in other economies. And that's probably all that matters in a global talent war. Kiwis need to stop pretending some LOTR-grade scenery is worth the trade-off of severe financial stress to house and feed your family.
After the horrors of galloping inflation in the 1970s and 80s the world made a good job of removing inflation expectations
by off shoring manufacturing to dodgy regimes with dubious employment practices, child/enforced labour etc...
where can we do that now? There isn't another China
It will be a 'monster' - inflation is set to go where many of us have never seen it before
Thanks David for preparing that worse is yet to come as many are already feeling the pain with hope it is darkest before the dawn.........thanks for making them realize that night has just begun and is way before the dawn.
This situation could have been easily avoided by rbnz by listening to the market and not manipulating the data that was screaming as early as December 2020 that extreme measures introduced in March 2020 has done its role and is time to pull back but..............waited...........and now....................
You are right with warning to fasten the seat belt for the roller coaster ride ahead.
Wish Mr Orr and Jacinda had that wisdom, instead of printing and throwing money to support and inflate already inflated asset class.
Three things:
- Why are the very same journalists and commentators that are filling the airwaves, newspapers, and online platforms with 'BIG Inflation is HERE TO STAY' headlines surprised that inflation expectations are increasing?
- More importantly, why place any importance on anchored, unanchored, whocaresanyway inflation expectations? The theory is completely flawed. It's the myth that won't go away (not least because economists rarely adjust their sacrosanct theories despite empirical evicence proving them wrong time after time).
- Hiking interest rates might take away disposable income to suppress demand (which will have very little impact on mainly supply-side driven price increases), but higher rates also increase input costs for many businesses - e.g. if they rely on credit lines from banks. Unsurprising then that prices are going up. Worth noting also that businesses with a bit of market power are putting up their prices because they can. See point 1.
Do you want to talk about the reverse of this process that has resulted in the mess we currently find ourselves in?
i.e. importing deflation via cheap goods, allowing credit/debt to be created domestically to pump asset bubbles.
What we have done probably won't look intelligent in hindsight, either when dropping rates to zero to combat imported deflation, nor raising rates higher than need to combat imported inflation.
You've made your point number 3 a number of times and I agree.
Let's think of a fictional Thai restaurant. It starts really struggling, as demand for dining slumps as interest rates soar.
Do they reduce their mains form $22 to $19, in the hope of pulling in more customers?
It's a forlorn hope. $3 per main will make no difference when demand is getting sucked out of the economy through the destruction of disposable incomes. It won't pull csutomers in. $15 a main might, but that won't be sustainable in terms of revenue.
Rather, the restaurant will probably go out of business. It might even think of increasing its mains by a dollar or two, to compensate for the reduced patronage. Heck, it gets a certain number of loyal customers, many whom will still come and won't see a big deal in paying a buck or two more for a main. And maybe the owners start working the floor, and cutting a couple of staff.
Jfoe,
I have just skimmed through the Fed paper, excellent.
"Finally, versions of these models that impose realistic contracting mechanisms (specifically, models that require labor markets to be characterized by voluntary exchange) look very different from the canonical model and do extremely poorly in fitting the data."
I just picked that quote from many. I rather liked Solow's quote and I can now forgive him for his Residual which should never have seen the light of day given how poorly it explained productivity.
Flying like an aeroplane, Loaded like a freight train, Inflation time tonight....
Crush the entire economy or sacrifice a handfull of very over leveraged speculators. Should be a no brainer.... but with Liebour you just never know what the tea leaves tell them to do. Could be telling to keep an eye on Labour ministers rental portfolios. If they start to decline...
Reckon next year could be a great time to take a UN job.
I'm going to embark on a thought experiment.
Let's assume I am very wrong, and the OCR rises above 3%.
What might that look like for the country? The economists might be right that rates will go higher than 3%, but I'm not convinced they are right on what the impacts of that would be - to me they seem to be vastly underestimating them. That was a key reason why I thought the OCR would never get to near 3% - because of the economic impacts of doing so. But let's assume I'm wrong, which I could well be.
Unemployment is low right now, so it could take time to work through the system.
However, assuming the OCR was 3% by November, I reckon something like the following could occur:
- The construction sector will be in big trouble by year's end, and unemployment in the sector (and related sectors) will soar. There will be a slump in new projects commencing construction by September.
- House prices will be down at least 20% by year's end. This will knock consumer confidence - a psychological effect - while there will be a real impact of people having much less discretionary income to spend when mortgages are 6 or 7%
- This will whack retail, hospitality and domestic tourism, and job losses will mount
- Unemployment will be mitigated by an exodus to Aus, although that will start slowing by October as the exodus slows (as the Aus economy slumps as well)
- Rents will drop, due to all the supply hitting the market first half of 2022, and demand sinking as emmigration booms and a significant number of young people return to live with parents
So..... lots of negatives. Will all this demand destruction really do much for inflation?
Will the Chinese restaurant start charging $15 rather than $18 because demand has sunk, or will it just go out of business?
Will the costs of construction slump, through reduced demand? Perhaps partly, but much of the price will be set by international players.
And what happens next? Say we get to March 2023, the economy is in a pickle, unemployment is 6-7% or higher, then what? Does that just become the new normal? The government gets much less tax revenue (GST, income tax), yet needs to spend much more (unemployment benefits)
Lots of questions!
But no easy answers!
One would hope that someone with courage and foresight in government decides to employ tradies directly and have them build necessary infrastructure and housing through the hard times, rather than just paying the dole to more and more.
Now we just need to find such people.
With all this talk of inflation, hiking the OCR aggressively, and keeping the dollar strong, there seems to be little discussion of the impact on exporters? Yes, international prices are generally high but that's not a given forever.
Also, while I'm not a fan of mass tourism, there's no doubt that international tourism is an important income earner for the country. A strong dollar won't help that as we open up and look to pull tourists back.
Old enough to remember last inflation cycles, but I never had much money back then to be concerned with it from an investment point of view.
Can someone knowledgable here tell me what the extpected TD rates will be in say 1-2 years time.
What could we expect the relationship between Mortgage Rate and Term Deposit will be?
What is the expected lag between the two? If Mortgages are 4-5 %, or 6-10% what TD's can we expect?
I know this is hard to predict but is there a general rule of thumb?
Are circumstances they same as the last ride?
What did others recall getting back 20 or so years ago or in the seventies spiral?
Asking for friend.
Dave
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