There are some doubters out there who struggle, unkindly, to believe that the Reserve Bank ever gets anything right.
But just about everybody will agree that they hope like hell the RBNZ is going to be wrong with its pick for the annual inflation rate as at the end of December. We'll all find out on Wednesday, January 25, when Stats NZ unveils the December quarter figures. Grab your popcorn, this is the only show in town.
It's all becoming reasonably high stakes stuff. As long as inflation keeps rising (or at very least staying stubbornly high) we can expect to keep getting flogged by more interest rate hikes from a central bank that's hell bent on knocking back inflationary expectations. And the more interest rates go up the more we get squeezed. And the more there is the risk that the economy completely tanks.
Okay, some context first.
Let's cast our minds back to late November 2022. A big talking point in a November 2022 RBNZ Monetary Policy Statement that was littered with big talking points was the central bank's pick for annual inflation to actually INCREASE again in the December quarter to 7.5% (from 7.2% in September), which would be a fresh 32-year high, and hold that increased level (IE 7.5%) through the March quarter before then starting to subside though the rest of 2023, easing to (a still-far-too-high) 5% by the end of the year.
Bear in mind that from pretty early in 2022 the perceived wisdom was that we would see inflation peak in the middle of that year. Maybe we just about did. But the RBNZ is predicting that we didn't. And if inflation really will still be running at 7.5% as of March then this will mean 'peak price hike' has been with us for nearly a year longer than anticipated.
We shouldn't, however, be shocked if such a scenario comes to pass. The reality is that both the height and duration of this inflation spike that we are enduring has been consistently under-estimated since it first started showing its ugly face.
At this stage it is worth running over some of the recent inflation history, because it is spectacular.
If we go back just two years to the December 2020 quarter, the annual rate of inflation was only 1.4%. That was it. Hardly worth mentioning. Our rate of inflation was somewhat BELOW the RBNZ's explicit target of 2% and at the lower end of the officially targeted 1% to 3% range.
A year and various supply chain struggles and other Covid-related woes later and the annual rate of inflation had rocketed to 5.9% by the December quarter of 2021.
So, into 2022 and by the end of the March quarter the inflation rate had hit 6.9%, increased again to 7.3% in the June quarter and then eased just oh so slightly to 7.2% in the September quarter. However, its possibly not an exaggeration to say that September quarter figure was the nastiest shock of the lot. That's because there was widespread belief ahead of the release of the figures that we would start to see some substantive signs of easing prices. Well, not a bit of it.
Applying some hindsight to the September figures, we can see that the (inflationary) impact of the re-opening of our borders had been hugely under-estimated ahead of time. Massive rises in airfares had a big hand in much of the upside shock of the September quarter figures.
This is all extremely pertinent when considering the December quarter 2022 and the first quarter of 2023. It's our first summer for three years with open borders. People are coming. They are spending. Our re-opened tourism sector is struggling to find staff in our super hot labour market. And then of course we are spending up to go on long-deferred overseas trips. It's an inflationary cocktail.
So, a big question for the December quarter inflation figures, which will also apply to those for March 2023, is how much of an impact all of this will have in terms of price rises?
The RBNZ, having been caught out by the extent of the open-border impact in the September quarter clearly doesn't want to be caught out again.
Which brings us back to the beginning, and will the RBNZ be right about 7.5% inflation? If it is this will shake the markets. The RBNZ will have a bright green light to go ahead with a 75 point rise to the Official Cash Rate (which would take it up to 5%) in the next interest rate review on February 22. We may see more upward movements in retail rates - particularly mortgage rates.
However...If the RBNZ is wrong, the markets will take this as a cue to start easing wholesale interest rates, while economists will be talking about there being no need for the OCR to go anything like as high at the 5.5% the RBNZ has indicated (by the middle of this year). Indeed if there are real signs of an easing in inflation, expect the talk to shift rapidly to when the OCR is going to be reduced.
The other key point to note here is the breakdown between the so-called 'non-tradeable' inflation - effectively domestically-generated price rises and 'tradeable' inflation, which includes imported inflation from things such as oil. The RBNZ's most keenly interested in the 'non-tradeable' figure, since that's the one it can directly influence with its OCR movements.
For the December quarter, the RBNZ is picking 'non-tradeable' inflation to be 7%. So, even if the 'headline' CPI figure comes in less than the RBNZ's forecast 7.5%, if the domestically-generated inflation's running hotter than 7% then you can again presume the RBNZ's likely to push pedal to the metal and go for that 75-point OCR hike.
In terms of what other economists reckon is going to happen, I didn't have all the picks in front of me at time of writing - but there was an unusually wide variance in the ones I had seen. I've seen picks ranging from 6.9% to 7.4%. The wide variety of views on where the figure will land paints its own picture about what uncertainty there is out there and how volatile the situation is.
It's just a number. But my goodness, how important that number will in the context of what happens next.
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119 Comments
Shockingly wet spring all the way up to Christmas. December we had two non rain days in the first 20 and almost zero sunshine. Swampy farms worst affected but very few ahead of last seasons production. Lots of depression out there.
Personally, a very tough season but we're evens to last year and in a pretty good place right now
Govt made rules banning cage eggs. But those rules did not satisfy the greenies who kept lobbying. So after most farmers had switched their operations, the supermarkets wanted to get in on the act of pleasing consumers. They said they won't take colony eggs. Never mind that farmers had already spent their capital budgets.
These are the same clever supermarkets that accepted millions of eggs from a company that bought cage eggs and simply pasted on new labels calling them free-range
I am not an egg farmer, this info I read when this came to a head. I know how relentlessly hard that farmers work to produce something of value. So from my perspective I feel we should as consumers show some appreciation of our nz farmers. They have to battle regulations that imported product does not have to comply with
The greenies and their usually young and inexperienced yet vocal activists are the problem aren't they.
Apparently because of the greenies, the slash gets left on the hillside for nature to takes it course. And the clubhouse at Mercury Bay could not be protected with a rock wall for the same reason, nature to take its course.
Today I learned that the supermarkets are full of greenies, who would have thought.
And of course if you had listened to any interviews or even read a newspaper report, the Mercury Bay buildings consent was approved on the basis that it must be moved in the future. That future is now.
You seem to misunderstand the problem. The problem is not that farmers chose to leave it to the last minute to change their business process. The problem is that farmers chose to exit the business at the end of the 10 years rather than invest millions (they didnt have) to buy new farms (for which they couldnt get resource consent for). All those farmers close to retirement just hung on for a few extra years or have now retired early, sold up their farms to residential land developers, banked the money at 5.25% and are enjoying their new stress free retirement while we now pay $10 a dozen for eggs.
And, again, 'inflation' is officially measured by a combination of baskets (kete?), hedonics, surveys and SWAG's. Unofficially, inflation gets measured by what it takes to top up the tanks, fill the pantry, and pay the utilities. So that unofficial measure is what drives public perception, which, as the advertising crews know, is Reality. So my local eggs have gone from $7 to $9/dozen. 28%. 7.5%? Pfffft.....
Yes, if we do get a CPI reduction, my first though will be: the basket must be wrong.
I noticed the inflation in the last three months on prices and expenditure, so it's a lot more than 7% pa for me. Media articles on how to cut costs and food bank usage are also very common. Durable goods do seem to be flatter though.
- Home & contents renewal up 40% (although broker has found me a more economical option with a different provider)
- Shopping feels a lot more than 7.5% more expensive. Even my partner, who could tell you the price of every item at Lululemon - in Yen if needed - but who has hitherto been ignorant of supermarket pricing, is now complaining at each and every shop.
- Rates up heaps (got to pay for the white elephant stadium and Dawn Baxendale's enormous, seemingly undeserved pay packet somehow)
- Power bill is definitely more expensive by a noticeable amount.
- Suppliers to my business have all put their prices up anywhere from 10-20% in the last year. One SaaS product I use has increased price 300%.
- Air fares are grotesquely high most of the time, particularly for anything regional.
I can certainly agree that inflation feels a lot higher than what is reported, particularly with respect to food, insurance, transport and other essentials.
I will say that I'm starting to see some better deals come through in consumer goods (went shopping mall yesterday and it was much quieter than normal, and some good deals on some items) but I don't need a new 65" TV every week to survive, and I can't eat two for $50 Hallensteins shorts for dinner.
Even if inflation is not 7.5%, why would any sane and smart person start thinking about reducing the rates?
Loose monetary policies due to political pressure from naive politicians led us to this situation.
Have we not learned yet that reducing rates too much causes people to go mad with borrowing, feeling artificially rich and the end result will be more higher inflation.
Let's be smart and make better decesions going forward.
Loose monetary policies due to political pressure from naive politicians led us to this situation.
Sadly no. We're here mostly because our market and supply systems aren't cut out for instances of global upheaval. Production is now concentrated where it's most efficient (or hasn't been outlawed), so there's less redundancy in the system than ever before.
Loose money has exacerbated the issue, but everyone's in the same place globally regardless of their central bank policies over the last however long.
Rubbish. When my grandad was a kid they couldn’t even afford toilet paper or shoes. Now the average working class household has multiple TVs, cars, excessive amounts of food, insulation, heating, holidays, alcohol, computers, phones, takeaways, restaurants, etc.
Remember when one of the measures of a countries wealth was how many landline phones there were per capita! It wasn’t that long ago.
When my grandad was a kid they couldn’t even afford toilet paper or shoes. Now the average working class household has multiple TVs, cars, excessive amounts of food, insulation, heating, holidays, alcohol, computers, phones, takeaways, restaurants, etc.
Problem is we managed to achieve this by modern day wage slavery overseas.
We feel wealthier because we found a couple billion people poorer than us to produce stuff we can afford.
In fact globalisations "modern day wage slavery" over the last few decades has lifted an extra billion or so Asian people out of poverty.
https://en.m.wikipedia.org/wiki/The_Elephant_Curve
Couldn't agree more. My wife and I forego many of the excess and save a good proportion of our income so that if we ever need the money, or if we have unexpected expenditures there is no worries whatsoever financially. More often than not the less you have, the happier you are. A reasonable place to live with power and internet, access to nature, good food, good drink (both subjective) and good company is a very cheap and easy way to live. Have a veggie garden, brew your own beer, cycle to and from work if you can, cook most of the time etc
So you are saying insulation and heating should not be included in the cost of living? And they would not have excessive amounts of food if those darn foodbanks kept giving it away.
And in your grandfather's day he could do his home with a pen and a piece of paper. Now a student cannot even get it graded unless they have access to the internet for research or a computer to type it on.
And he should buy a house at 3x median household income, with only needing one wage earner in the house.
If people bought a 100 sqm home with 3 bedrooms and one bathroom, and no garage, without all the "energy efficiency" costs of insulation/heating/double glazing etc like our parents and grandparents bought in their day, then those homes probably would be 3 times median household income. Instead a new home is now a minimum of 3 bedrooms, 2 bathrooms, 2 living areas, double garage, full landscaping, walk in wardrobes, and a coffee station. I go look at those old 50's houses and think about how its going to cost $100k to upgrade them to a "normal" FHB home and then think the problem is that we are not building basic houses anymore, so its unrealistic that they will ever go back to 3 times income.
I would be quite happy with a "100 sqm home with 3 bedrooms and one bathroom, and no garage, without all the "energy efficiency" costs of insulation/heating/double glazing etc like our parents and grandparents bought in their day".
Trouble is finding one that is anywhere near "3 times median household income" in a town that is not dying or on a flood plain.
Just for a little more context housing was 3x median income in the early 1990s, when housing had all the things you say are extra, but I agree to a point but the extra increase from 3x to 8 to 10 x is mainly policy waste.
So how about we just remove all that waste down to say 5x median income and still enjoy the coffee?
Food has gone up way more than 7.5%, I recon more like 10%. Some things are just a joke $10.95kg for tomatoes in the middle of summer, hell some years ago they would drop to like $3 a kg. If the RBNZ moves 75bps then the shit is going to well and truly hit the fan with mortgage rates.
Why buy, you can grow them yourself on a patio and huge health benefits gained watching them flourish. If they don't, nothing lost. If more people grew their own, you would soon see the supermarket prices drop.
Luisa plums are juicy and sweet, taste and look like a small mango. Am harvesting them off our tree and giving away. Takes a little fertiliser at the right time and not much care, very easy.
I can only imagine the intensity of lobbying that any government would come under if any proposal to cut sugar consumption was remotely proposed by any party.
Of course that is exactly why we have a democratically elected parliament, to enact legislation for the good of us all.
It's amazing how inflation is always interpreted relative to expectations, rather than actual objective measures.
If the consensus is for 7.4%, and it comes in at 7.3%, stocks will surge, yields will plummet, headlines will be picking the end of high prices, markets will be risk on. Uh, hello - inflation is at 7.3%.
Markets are so skittish these days. Always trying to skate to where they think the puck is going to be, but falling for feints in the process.
14.5%. When, is what we don't know.
Just on a year back, you could have fixed a mortgage for 5 years at 2.99%. Why? Because there was an overriding view that "rates are going lower", and few wanted to miss out on those lower rates by locking in at what were still seen as 'high' rates. Today, we have the same mentality, that "Rate have to go lower! Because (pick your favourite reason)".
No one knows, as they didn't in 2021. But the one thing that's remained constant is the belief that 'they have to go lower', and they haven't. History, and all of that.
I'm still sticking to my 6% TD rates for the 1 year on the 1st March. The banks are going to very reluctant to offer more long term as this whole thing could come crashing down like Housemouse has repeated to try and save the economy. I don't see rates coming down to where they were, but a dip is inevitable at some point.
And yet we see 6% as being high today. It isn't!
15 years ago, any of us could have locked in a Term Deposit with any bank at 9.8% - and higher if we wanted the risk associated with a non-bank institution. And what was CPI back then? I'd guess 4%, but can't be bothered looking it up.
Until we have globally returned to positive real inters rates, then anything can happen - and probably will. But lower rates are unlikely to be part of that future.
bw - The Chicago fed reckons that interest rates need to be 2.5% more than OCR to reverse inflation so an OCR of 5-5.5% will see 2-3 fixed rates at 7.5-8% and refixing a 3% rate to 7.5% on a 400K mortgage will cost $18,000 a year more and that will hurt so much I see Political blood spattered on the Moon.
One might imagine 3-5 year TD rates will peak in the middle of the year in the 5.5-6% range, and Kiwibonds at maybe 4.75-5% (there is some distortion due to the potential of the $100,000 TD guarantee coming in which may be enacted by June/July).
One would imagine that there will be huge pressure to start reducing interest rates by the end of the year, but maybe inflation will still be active then?
One solution is to use offers like Heartland's 30 and 90 day accounts as short term "TD's" and just roll them over until you have to make a decision - offering 4.25 and 4.5% is pretty handy. Basically open them and then the next day give notice so you make it into a short term TD. Rinse and repeat until you are ready to jump into the longer TD's because you think rates have peaked.
The temptation now with flat rates from 1 to 5 year is to go long. The reason is the ASB lets you break with 1 months notice and the rate you get rolls back to the term you would have had. Basically if you go 5 years at present and you keep it all in for a least a year you can break with zero penalties because there is no interest to pay back.
Looking at what's going on in the World today - what bits we are allowed to know - you could be forgiven for seeing just two camps in the economic sphere. (1) Those who see 'things' deteriorating, and are preparing for that - let's call them the "Rates are going up, get ready" crowd, and (2) Those who see exactly the economic same scenario, and figure "It doesn't matter what we do, so we may as well be hung for a sheep as a lamb" - They, are the "Interest rates are going to fall" advocates.
Those who were in Camp (3) - Fundamental Change is coming for the better, went the way of the Dodo some time back.
Only partly true Yvil. The top 1% took 2/3 of all the new wealth since 2020 (Source Aljazeera news). The fact is the people at the top are now taking a larger and larger percentage of the pie. This can only continue for so long until there are riots in the streets. Your chances of getting ahead are diminishing by the day, that's a undeniable fact.
Even if the vast majority of the prices stay the same and you plug in the food price index and rent data from last week (and a few other things that *always* edge up), you're up to 6.6% for the annual CPI already. My guess is that it will come in at around 7.3%.
But, if you actually look at the CPI basket, and focus on the allegedly non-tradeable components that are behind most of CPI increases, you will see some obvious issues. For example:
- this quarter, we will have a whopping 2.1 percentage points of annual inflation coming solely from food - with 0.6 of that being classed as non-tradeable (domestic). But, talk to anyone in the food industry and they will tell you that prices of apparently non-tradeable things are going up because of fuel prices, fertiliser, and plastics (international oil price related), and... high interest rates, which are hurting their credit costs(!) There are also some lost economies of scale and efficiency (weather and challenges getting staff)
- many of our allegedly domestically determined prices blow in the wind of international auction prices (beef and milk prices for example). At least we can't export our natural gas or we woul be paying way more for that too
- last quarter, 0.2 percentage points of the CPI increase was due solely to increases in Local Govt Rates (clearly a domestic issue). Would hiking interest rates earlier have stopped local Govt rates going up?!? Thankfully, we won't see that bump up again until Q3 2023
- the other major non-tradeable components of CPI are rent, purchase of housing, and property maintenance. Rent will add about 0.9 percentage points to annual CPI next week, and will carry on doing so for the next year or so at least because of how stats calculate rent index (and how stable rent increases are across the stock). Purchase of housing and property miantenance is anyone's guess - but anyone who thinks the cost of building or maintaining a house goes down with higher interest rates is nuts
So, apologies for the long comment, but the detail is important. My strong view is that we are seeing price increases because of higher input costs, lost efficiency, and businesses increasing prices to protect their margins because their customers know that things are costing more (and because we don't have high levels of competition in NZ).
Hiking rates in this environment is just as likely to lead to price increases, because credit is a significant input cost to the components of the CPI that are running hot. RBNZ are getting this spectacularly wrong - this is no time for dumb 'pull the lever' reckonomics.
Hiking rates in this environment is just as likely to lead to price increases, because credit is a significant input cost to the components of the CPI that are running hot. RBNZ are getting this spectacularly wrong - this is no time for dumb 'pull the lever' reckonomics.
Thoughtful and intelligent perspective as always. And counterintuitve. Nevertheless, the dogma that hangs over the RBNZ is a powerful force. That same dogma is accepted across the spectrum of their key stakeholders. So it's relatively easy to understand how they will behave. Rates will probably be 'hiked' and a post-hike conference will explain the why. The 'real world' carnage would have to be palpable for them not to hike. We don't seem to be quite there (at least if you're a central bank bureaucrat living in Wellngton). Still at the complacency stage. Anger and depression are still further down the road.
The property ponzi is really the key determinant for "stopping the rates". Not plastics or tomatoes. If housing goes, she all goes. And at the moment, destruction is relatively benign.
Thank you, and, you are absolutely right about the dogma. If RBNZ don't hike rates when our aggregate basket of prices increases (for whatever reason) they will be chastised. It is better to be wrong with everyone else, than to be wrong alone. The collateral damage is horrific though - once it breaks, there is no soft landing.
Sounds like you're a believer of President Ergodan's economic theory of cutting interest rates reduces inflation?
https://www.cnbc.com/2022/11/03/turkeys-inflation-tops-85percent-as-erd…
Turkey's situation is pretty special - they are making a fundamental adjustment to their economy so that they don't have to keep sending free money to overseas speculative investors. You might also want to check out the more recent stats on their inflation (it is now subsiding pretty quickly).
My point (belief?) is a simple one. Hiking interest rates has a range of impacts across the economy - sometimes higher rates will increase prices (because the cost of credit is a key input cost for businesses) and sometimes higher rates might lead to price decreases (e.g. cuts to disposable income via mortgage rate increases lead to businesses having too much unsold inventory, so they drop prices to clear). The challenge for central banks is working out what the net effect will be in the short- and long-term. Their models are too crude to do this - so they follow the dogma because that is how they all keep their jobs.
There are alternative approaches - economists across the world are revisiting input / output models to look at the network effect of prices on each other. Sadly, most of our economists keep the faith with medieval monetarism.
Yeah, that was my point about madness. Hike rates aggressively again and prices/inflation will increase.
Do nothing and inflation will remain relatively stable but wages might be able to close the gap. More people can produce more goods and services; whereas higher costs of servicing debt cannot.
This is wrong. Hiking rates increases the value of money relative to actual things. So the price of actual things like food imports fall in value relative to the value of money. Most poor people also have most of their wealth ties up in money balances. So this group disproportionately benefits from a rise in interest rates.
Neither Robbo nor Orr seem to be held accountable for the fact that they erroneously thought Covid19 would stall the economy ... even though it was robust at the time ... so they juiced it further... over juiced it ... and now they gotta hit the brakes & cause alotta financial pain , 'cos they dont really know what the feck they're doing ...
Is it possible that nobody was smart enough to have got this right,
GBH sums it up well. Nevertheless, I'm more than sure that even a few armchair experts could have predicted these outcomes. In fact, there are some prominent experts who have clearly suggested that central bankers' actions manipulating the price of money would have lead to wild inflation. Stanley Druckenmiller is one of those people.
They were still juicing the housing market up until December through Funding For Lending, it didnt take an actual economist to understand that that programme should have been stopped a long time ago - if it was implemented as an emergency response, it should have been removed as soon as it was apparent there was no emergency
People are coming. They are spending. Our re-opened tourism sector is struggling to find staff in our super hot labour market. And then of course we are spending up to go on long-deferred overseas trips
One off sets the other to some extent,the RBNZ CC release up to November shows an increase in OS cards here for the first time outweigh the NZ card use offshore difference is small at 64 m,and not a game changer.
https://www.rbnz.govt.nz/statistics/series/lending-and-monetary/credit-…
Supermarkets are still putting up prices a lot. Especially with lower priced goods. For example ice cream cones were $ 2.5 last month, now $3. That is a huge percentage increase. It is interesting because a lot of other retailers don't seem to be putting prices up, partly because people have cut back on spending. But people have to buy food and we have a duopoly.
Our PM this afternoon:
"New Zealanders shouldn't have to have a six-figure salary to be able to buy their own home"
Then fix that, Chris. The ball is in your court for another 9 months. If you want to play with it a bit longer, then remember why 'you' were given such an overwhelming mandate at the last election. Saving your 'promises' for the campaign trail will be too late. "Let's do this!"might have been a catchy phrase used by your predecessor, but it's value a true today as it was back then.
In that case, he'll need to raise LVT on unimproved land value, lower income taxes significantly to incentivise productive work over speculation, and liberalise zoning immediately. That'll do the trick.
It will cut squarely across the entitlement mentality of generations to getting rich quick off land by saddling following generations with ever more debt though.
Agreed. With educated youth and their future taxable income exporting themselves to Aussie, and ever increasing numbers and cost for retirees trying to live forever the math of NZ fails. Shifting the tax burden to something that is fixed regardless of population trends makes more sense, and opens the door for a higher rate for foreign capital being hidden here in property assets.
I take the opposite view to many here. Even if inflation does top out later this year we are still nowhere near a 1 to 3% inflation target. The last time they met that target was Q1 of 2021.
How much longer will it remain societally acceptable that RBNZ fail on inflation now that cost of living payments have finished? Remember that government are now removing the supports like RUC and petrol tax relief in the first half of this year. The imposition of additional taxes will again increase CPI.
The Labour government will not be changing the fuel tax right before the election, you can guarantee this will remain in place for the whole of 2023. Lookout for more promises of money in your pocket if Labour gets re-elected because the only way they are getting back in is to come up with a giant lolly scramble.
Will be difficult to avoid with food and grocery inflation running at 10.5% and the reversal of the temporary reduction of fuel prices. On top of that the USD is dropping in value and energy commodities like the RBOB Gasoline are increasing faster than the USD is dropping and the NZD is appreciating so expect more pain at the pump.
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