So, what is the Reserve Bank (RBNZ) to make of the latest labour market figures that on the face of it tell it to do two completely different things?
The surprise rise in unemployment might, at first flush, suggest the RBNZ may be able to think about backing off somewhat with its current super-aggressive interest rate hiking cycle.
The perhaps even more surprising very sharp rise in wages is possibly suggesting something else. Maybe it needs to get MORE aggressive with those Official Cash Rate (OCR) rises because clearly a wage-price spiral is now under way that could put a bonfire under that already hot 7.3% inflation rate.
Undoubtedly the folk at the RBNZ will be looking to get under the hood over the next few days to work out in minutiae just what this labour market data is telling us.
The slight rise in unemployment from the previous record low of 3.2% (where it had been for each of the December 2021 and March 2022 quarters) to 3.3% could be telling us that the peak has been reached and the labour market will now start to cool.
But, with employment levels not budging at all, the suspicion has to be that there just are not the people to fill the jobs. So, in effect we've reached a bit of a stalemate. Employment can't grow. Unemployment can't shrink. If that's the case it doesn't suggest the labour market is getting any cooler. Far from it.
And what about those wages? Statistics New Zealand produces several different figures to measure the growth in wages.
In the interests of simplicity, I prefer to look at the private sector hourly increase. And that was 7%. So, not far short of the 7.3% inflation.
The RBNZ makes its next decision on the OCR on August 17. This decision will be accompanied by the full bells and whistles of a Monetary Policy Statement. That's good because it means the RBNZ will update its 'forward track' for the OCR where it forecasts the expected level of the cash rate over the next three years. And it's also good in that the RBNZ gets plenty of space to explain why it has made the decisions that it has.
The last 'forward track' for the OCR in the May Monetary Policy Statement suggested the OCR peaking at just under 4% by the middle of next year. Wholesale interest rate pricing is currently pointing toward a peak of a little less than that.
Remember, the OCR is presently on 2.5%, having been hiked by some 225 basis points already since the RBNZ starting this hiking cycle (when the OCR was at the pandemic emergency setting of 0.25%) in October 2021. The last three OCR reviews have all seen 50 basis point rises and another 50 pointer is universally expected for the August review.
After that the views of economists start to diverge a little - largely depending on where they see the OCR needing to finish up to achieve the RBNZ's goal of slaying the inflation monster.
And it is fair to say that the contradictory nature of the latest labour market figures has fuelled some further divergence in the views of the economists.
That comes back to the essential riddle that's provided by the data, namely: Is it telling us that the labour market is cooling, or is it in fact heating?
My view is that the RBNZ will be more swayed by the hot wage figures than it is by the slight rise in unemployment.
In that last MPS in May the RBNZ was forecasting private sector hourly wage increases of just 5.6% - versus an actual outcome of 7%. That's a hell of a miss when you are vitally concerned about the prospect of a wage-price spiral.
As I say, it's now up to the RBNZ to pore over the labour market detail and try to make the informed decision as to whether the data is telling it that labour pressures are cooling, or whether the risk is that inflation could get another kick from the hot wage figures. On the latter point it would hang on whether the RBNZ sees these wage rises as the peak and whether it believes they won't in themselves fuel another round of secondary price increases.
Hey, it's looking like a tough job from where I'm observing it, and I don't envy the RBNZ.
There's one more key piece of information for the RBNZ to digest before it makes the final call on August 17. That's the central bank's own Survey of Expectations in which a small group of experts offer their views of where they see inflation over the next one, two, five and 10 years. The RBNZ likes to see 'inflation expectations' sitting around 2%, which is the targeted midpoint of its 1% to 3% range. Well, the expectations have moved well away from 2% recently - and if the next survey shows continued divergence from that then this will be another push for the RBNZ to keep aggressive. If, however, there is an easing of expectations, that could tilt the RBNZ in a more 'dovish' direction.
What would I do if I were the RBNZ?
I think the picture painted by the labour market data is too cloudy to make a bold decision. I don't think it should be inferred that the latest data suggests unemployment is now necessarily on the rise. Nor does the data necessarily suggest that wages are going to keep heading north.
However, what the data would suggest to me is that caution is needed. My suspicion at this point would be that, yes, the RBNZ will hike the OCR again by another 50 points to 3% and it will retain a forecast OCR peak of about 4%, or maybe even just a bit more. And it might bring the timing of the peak forward a bit, so that the market would be left with the clear view that the following OCR review in October will also see a 50 point rise.
The RBNZ already got too far behind the inflation eight-ball. It won't want to risk lagging further behind by backing off now and finding out later it was the wrong thing to do.
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A three year forecast is laughable - what's the point? Given the hapless forecasts we've endured in the last 24 months, I can't see gazing further out is going to improve the RBNZ's aim.
0.5% hike is a gimmee. There is more data supporting an aggressive hike in my view than a steady as she goes approach. Inflation is compelling, house prices are still high based on historical data so although the vested brigade will have us believe it needs reviving already there is room for more OCR rises. Now we have wage hikes approaching inflation and don't get me started on currency stability.
I'd like to see a "shock and awe" (or at least a surprise) 0.75% rise this time to change spending behaviours.
Path of least regret is to put the inflation genie back in the bottle, then look at the other issues once the big one is under control.
NZ is already done, it seems. Not because the RBNZ have kept the OCR too low, but because they first kept it too low at 0.25% (paired with QE and LVR removal), and now they are killing the very people they had invited to buy, with a massive oversteer in OCR hikes.
As a result, unemployment is rising despite a massive percentage of staff being constantly away sick! The NZD is dropping. The property market has crashed. Immigration has turned to emigration.
Any more OCR hikes, and we will have a financial crisis like Ireland, Greece, Italy, Spain had around 2007. Only difference: We are not in the EU, so who is going to bail out our banks and protect savings?
The inflation, created as as monster with QE and ultra-low OCR and government spending via Covid support, cannot be tamed. It is:
a) accept inflation, or
b) create total collapse (with mass insolvencies, unemployment and ... still inflation)
"and now they are killing the very people they had invited to buy"
Exactly, this emphasizes the irresponsibility of the govt & RBNZ, they are supposed to support stability!
The collapse will happen either by prolonged high inflation or tightening, high inflation hurts everyone and higher interest rates hurts a portion of mortgage holders who find the going tough. The job losses that will come were only artificial anyway as a result of the money scramble. So obviously the RBNZ will chose OCR hikes and lets remember it is only now reaching a neutral level.
I agree, a minimum of 75bps OCR raise is necessary this month - at the very least. Clearly there is a wage-price spiral is now under way, and the RBNZ have completely failed in their task of controlling inflation and its embedding in the economy.
Actually, there should be 75pbs raises until inflation starts getting back under some control - and if the OCR needs to get well over the 4% mark, to 5% or even higher, so be it. We now need a capable new head at the RBNZ to carry out this necessary process, and to get rid of Orr as soon as possible - he has done enough damage to the economy with his idiotic ultra-loose monetary policy and reckless unprecedented expansion of the monetary base .
I agree, a minimum of 75bps OCR raise is necessary this month - at the very least. Clearly there is a wage-price spiral is now under way, and the RBNZ have completely failed in their task of controlling inflation and its embedding in the economy.
It is as clear as day. How does the general public not see this? We are blind to inflation, like the dinosaurs were blind to the meteor before it hit.
Maybe the last serious bout of inflation was so long ago that we have lost the collective memory of it.
What a ridiculous statement, anyone can see inflation! What we are blind to, you included, is the deflationary collapse that is threatening our economy.
After years of money printing, inflation simply cannot be contained without collapsing the house of cards that has been built with the printed money. Unfortunately, a total collapse will not so much affect the property vendors to which the printed money has gone. It will affect the borrowers, then the banks, then everyone.
Deflationary collapse is not funny. Anyone who has experienced the Great Depression of 1929-32 has now died out. These people could tell us something: It may be better to go through a few years of mild to high inflation (without hyperinflation) than to collapse the entire system.
Total collapse, which could result from further OCR hikes, could trigger mass insolvencies, unemployment, bankrupt banks, people losing their savings, etc. If, in such a collapse scenario, the system would start printing like mad, we would see hyperinflation - the result of continuous oversteers by the RBNZ.
Hey, it's looking like a tough job from where I'm observing it, and I don't envy the RBNZ.
It's hard to comprehend how much the shadow of covid is still haunting things, so making definitive choices is very difficult.
Years away from "business as normal"*.
*usual caveat of world not falling to pieces in the meantime - Sri Lanka is toast, Pakistan and others not looking awesome, and no one has any idea what's really going on in China and Eastern Europe.
Many places seem to be doing it simply to reduce the speed of spread.
Our office does not do it (wear masks) and we had two waves take out the office, a half at a time. We had a large group of people down each time, with minimal if any ability for most of them to work.
I have heard from family members in the insurance industry that their company rules are more strict, and employees are asked to work from home more than in the office to also reduce speed of spread and the number of folk out at a time.
I was shocked, too. Could not believe that middle-aged harrumphs that we should move on did not do the trick sufficiently to prevent such sweeps through our offices.
Yeah, cause wearing a mask is just as impractical.
It's not a coincidence that Europe and America have some of the lowest uptake in measures like vaccines and mask wearing, and the highest instances of infection and death.
But no one's being told what to do no more, which is the main thing.
Spread and contraction of covid can be mitigated by a few simple measures. It's wiser for a society to minimise instances of highly infectious diseases that take people out of action for days/weeks.
Its interesting these concepts need to be viewed as virtue signalling and hypochondria.
As I mentioned earlier, highest instances of flight cancellations on earth.
So no one's being told what to do no more, which is liberating, but covid obviously didn't get the memo.
I spose everyone put out and inconvenienced can just blame a central authority for creating the situation.
how simplistic Yvil -- In the EU they are struggling with massive absenteeism and sickness -- from repeat doses of Covid -- long term absences from long covid symptoms, huge flu numbers due to compromised immune systems re covid --- as well as significant numbers of people opting out of the labour market entirely -- or forced out due to burn out.
Sure they are not wearing masks, having restrictions on movement or association -- and just moving on - but to suggest that the impact of Covid is not massively and significantly effecting - Production, Supply, Labour Market, Health outcomes - ie all teh stuff that matters -- is surreal at best !
Europe's leading the world in cancelled flights, followed by the US.
Not really rocket science, there's no cure-all but you can certainly mitigate risk. Masks reduce the spread of infectious disease, as does washing hands and general personal hygiene.
But now it's not compulsory to wear them, so screw that, filth wizards of the world, rejoice!
What you are calling an healthy economy is in reality a textbook case of wage-price spiral, exactly like it happened in the 70's.
A healthy economy is an economy where wage increases reflect an increase in real productivity and in the overall wealth of a nation, not a mere reflection of prices spiralling out of control due to too much money chasing too few goods and services, or even worse an economy based on the delusion of unrealistic and unsustainable asset prices, like in the case of the NZ housing Ponzi.
Let's be clear, there isn't going to be a soft landing - the RBNZ are not nearly switched on enough to achieve that, that would require some brave decisions (a lot easier to keep hiking). They have damaged 3 decades of credibility as a Central Bank with an OCR now heading towards 5%, having been at 1.25% pre-covid, and with the economy in worse shape, all packaged in a mix of "least regret's" and "Te Ao Maori".
RT, inflation is going to "go nuts" whatever the RBNZ do. They could raise the OCR to 10% and it's not going to push inflation down, it's too late. For those referring to vested interests, well the OCR is already much higher than pre-covid. Those calling for >3.5% OCR have a recession fetish. By being brave they need to stop at 3% and start QT - selling the LSAP. This continues the tightening path but at the Crown Accounts level and not the real economy.
Someone made a good point on another thread that the lift in the minimum wage might have had a significant effect on wage inflation.
Given that was in April, it will take until May 2023 for that to not be impacting on YOY wage inflation.
Someone here likes to talk about 7% a lot. I like to talk about May 2023 a lot :)
Kind of ignores the fact that inflation in NZ has been running ahead of the policy targets for a long time now, well before Vlad rolled into the Ukraine.
Pointing to overseas and shrugging your shoulders as a politician is not an acceptable response, but it sure as hell is a lazy one.
They shouldn’t raise the OCR any further. The wage inflation has simply been to catch-up with cost of living inflation which is already embedded in food prices etc. Wage increases simply for the purpose of allowing people to meet current costs will not cause further inflation for food and gas etc.
Likewise, those lucky enough to own a house but having to pay a mortgage will already be devastated when their existing rates come of lower fixed rates. The largest portion is yet to still come off lower rates.
But, as we have seen before, given the RBNZs incompetence, they will probably just blindly plough ahead with further OCR increases without actually using any intelligence to look below the surface.
I heard someone make the following comment on the radio..."If we want everyone to have a fair share of the pie we need to grow the size of the pie"
With (il)logic like that its not surprising we have problems.
Fast rising wages...not fast enough to outpace the CPI ... Its a mess and its not going to disappear in a puff of smoke. Not encouraging folk to hold savings might come back and bite some of the big shakers and movers. The prudent that endured low deposit rates will be better placed to endure what is ahead so much so that their capital might be what buffers the bigger fish, because theres having an asset but no liquidity versus having plenty of liquidity but no asset. Another house on the books probably not that great compared to holding plenty of liquidity presently. Nice too see banks tweaking mortgage rates to suit the current market stress but in doing so they are probably displacing reality with fingers crossed.
Sleeping? Inflation? Exhange rates? Economy?
Be fair - those guys need time to focus on new skool reserve bank duties first - like their te ao Māori strategy, printing money, lunches with the big bank ceo's and sustainable employment.
Anyone would think we have a cost of living crisis. Or housing price crash or something . Some people apparently are even skipping meals and sleeping in cars.. unreal. Let them eat cake.
The devilish truth is in the details.
In the last few months unemployment has nudged up. This is because there have been significant drops in filled jobs in sectors vulnerable to reduced consumer demand / confidence. Construction, hospo are the obvious examples.
On top of this, the prices of things that people need to access jobs are going up faster than wages - petrol, rents, second hand cars etc. This is making low paid work inaccessible for many.
The solution here is not less jobs, it is lower prices, and investment in the infrastructure people need to live and work - temporary rent caps, windfall tax on profiteering banks, social housing, public transport etc.
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