Okay, so here's where we find out if those massive interest rate hikes are starting to 'do the trick' on inflation - and are therefore worth the pain being inflicted, particularly on mortgage holders.
We really have to hope the rates hikes are 'doing the trick'. After all, tackling the inflation beastie is what the high-speed ascent of the Official Cash Rate from just 0.25% at the start of October 2021 to 5.50% now is all about. This is what the Reserve Bank's engineering of a recession and pending job losses is all about. The RBNZ wants the inflation beast slayed. And asap.
The latest instalment of the inflation battle will be played out when Stats NZ releases the June quarter Consumers Price Index reading of inflation on Wednesday (July 19).
For the March quarter, annual inflation was at 6.7%, and that was down from 7.2% in the December 2022 quarter - remembering that the peak, and a 32-year high was, 7.3% as at the June 2022 quarter.
So, the big question is will inflation continue to fall as of the June quarter this year? Well, it should do, and maybe by quite a meaningful amount. The RBNZ is forecasting an annual rate of 6.1%, down from that 6.7% previously.
At time of writing I had three of the major bank economists’ picks in front of me and ANZ, ASB and Westpac are all picking 5.9% for the 'headline' inflation figure.
If they are right, it would be the first time since December 2021 (when the annual figure was 5.9%) that inflation has gone under 6%.
Now those of you who are fairly fresh from reading about how food price inflation has surged back up again to a 30-odd-year high of 12.5% might wonder how it could be that 'inflation' is apparently coming down? Well remember, while food price rises are something we acutely notice, they actually make up less than a fifth of the composition of the Consumers Price Index.
There are many other component parts.
The key thing to look out for in the figures in the coming week will be the breakdown between the so-called 'tradable' inflation and the 'non-tradable' inflation. In basic terms the tradable inflation refers to 'imported' inflation - such as through imports of oil products - while 'non-tradable' inflation refers to domestically generated inflation, such as building costs.
It is the domestically generated inflation that the RBNZ can directly influence through its interest rate hikes - so, the domestically generated inflation is the data we should be scrutinising most closely.
In this regard it is well worth pointing out that for the March quarter 2023 the reasonably substantial fall we saw in annual inflation to 6.7% from 7.2% was entirely due to sharp falls in overseas-generated inflation. The tradable inflation figure fell from a stratospheric 8.2% as of the December 2022 quarter to 6.4%.
Meanwhile, however, the non-tradable, domestically generated, inflation actually ROSE to a new high of 6.8% up from 6.6% in the December 2022 quarter.
It goes without saying that we need to see the domestic inflation figure falling before we can start feeling confident that the RBNZ's measures to date really are working.
So, what's expected for the coming week's figures? Well, the RBNZ is forecasting that the tradable inflation figure will continue to drop - down to 5.8% from 6.4%. And it's also forecasting the domestic inflation figure will drop too - to 6.3% - from that peak 6.8% figure.
ANZ senior economist Miles Workman and economist Henry Russell say there’s some "low-hanging fruit on the tradables side of the ledger".
They point to ongoing global goods disinflation reflecting slowing momentum in China, fading supply-chain disruption, a much lower oil price than a year ago, and a "dramatic" normalisation of shipping costs.
In terms of non-tradable inflation, the ANZ economists expect reduced construction cost pressures to be knocking nearly 0.6 percentage points off annual non-tradable inflation.
So, inflation is reducing.
But whatever happens in the June 2023 quarter we will now have had inflation outside (and mostly WELL outside) the 1% to 3% official target range for two years.
That's significant, because it's long enough now for the dreaded 'inflation expectations' to start getting entrenched - for people's behaviour and future wage pricing expectations to incorporate high inflation, and therefore actually lead to ongoing price rises.
This is why the RBNZ has been in such a tearing hurry with its rate hikes. That's why the RBNZ was prepared to put us into a recession. Because it is trying to knock over actual inflation before those inflation expectations are just as ingrained as they were in the 1970s and 1980s. Ongoing inflation would be a killer for our economy.
Assuming we do see a reasonable fall in annual inflation for the latest quarter, can we expect this to be a continuing trend? Well, the RBNZ thinks so. It is forecasting for annual inflation to be down to 4.9% by the December quarter and then to get back into the 1% to 3% target range as of the September 2024 quarter.
Nice if it happens, but I'm still not so sure it will all be quite so smooth.
We do need to see at least some magnitude of fall in the domestic inflation in the new figures in the coming week to feel reassured that we are truly heading in the right direction.
The RBNZ is forecasting non-tradable inflation to fall to 5.2% by the end of this year and 3.5% by the end of next year. So, this domestically generated inflation is being seen as likely to be much more 'sticky' than the overseas sourced inflation, which the RBNZ is forecasting will be down to 4.8% by the end of this year and just 1.0% by the end of 2024.
How 'sticky' this domestic inflation may prove to be is the key factor.
Is there any chance at all of 'nasty surprises' in the latest inflation figures?
Well, if there is to be a spanner in the works, then I would suggest this would mostly likely be if the non-tradable inflation figure comes in higher than expected. That could knock confidence and shake things up a little.
My best guess would be that for now anyway we are likely to see all the inflation figures tracking in the right direction, IE down.
But I'm still not convinced that the path downward for inflation next year is going to be as smooth as the RBNZ sees it yet. Remember, we have had two years of elevated inflation now and that's been long enough for us to pick up some 'bad habits' in terms of future pricing behaviour prompted by inflationary expectations.
That will be something to be considered next year though.
What about mortgage rates then? Any relief to be expected if inflation does fall as expected in the June quarter and for the rest of this year?
Well, in its latest OCR review this week the RBNZ expressed quiet confidence that it is now getting the measure of inflation.
But it also referred to "interest rates remaining at a restrictive level for some time". So, in other words, we should NOT expect interest rate falls till the RBNZ is wholly confident it has slayed the inflation beast.
Fingers crossed, the coming week's figures should be a good step in the right direction. But they will be just one step.
In the meantime, mortgage rates will remain elevated, spending is likely to be stifled, and the economy will keep slowing.
If we can truly beat inflation, it will probably feel worthwhile.
But we haven't beaten it yet.
Consumer prices index
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50 Comments
What do you have to gain by dishing out (in my opinion), very dangerous advice? Are you qualified? Bottom feeding stuff here Zwifter, FOMO is real and so are people's hopes and dreams. A balanced approach is what's required at the moment. Not shameless idiotic braindead moronic knuckle dragging shouting.
I don't like those comments either painter. If I were a FHB, I'd be talking to my bank or mortgage broker about my lending ability. If all the planets aligned and I felt comfortable with the price (I'd be looking at the lower end of approx value), sure, I'd go for it. That's the approach. Not overpay for something because Zwifter says it's FOMO time again. Zwifter no doubt spends too much time locked in a dungeon on his zwift app talking to virtual 'friends". The concept of a society is perhaps lost on him.
My honest feeling is "I'm waiting for the penny to drop" on values of everything, but that's not happening.
Even if we take vehicles, they got expensive, and many types are still increasing in value today. Earlier on I figured cheap money and bored covid stay at homes were juicing the values. But it turns out at the same time the average new car has gotten quite a lot more expensive thanks to new energy vehicles, while at the same time emissions and safety controls have reduced the volume of cheap second hand cars into the country. So there's now a shortage of cheap used cars, that'll likely only grow, not recede.
I think 2024 could get kinda rough but maybe this is the worst of it. And the sad new reality is that the basics of life, food, energy, housing etc just got a lot more expensive relative to income/past savings. If that's our actual reality, much of the commentary on this site needs a reality check. How can one prepare themselves for this possibility? Should people bide their time for the market to meet them, or make other arrangements?
Time is very much on the side of the patient saving FHB. With the immediate future of high TD returns rated against their biggest target purchase declining heavily in price. Low ball offers from early 2024 to take opportunity with the exiting over-leveraged is a good starting point. Many investors are now tapped out of options now that their precious equity stepladder has begun loosing its rungs. and with some its been pulled from beneath them completely.
Yes - exactly:) Although, fire and brimstone is not necessarily required. its about FHB's timing their entry to when the over-extended are exiting. What was that famous quote from Warren Buffet again? "Its wise for investors to be “fearful when others are greedy, and greedy when others are fearful.”
Now, since FHB's are investing in their future financial wellbeing, smart money will follow this advice.
Pa1nter, much like Yvil, it often seems you're just contrary for purposes of self gratification more than anything else.
I wonder if Warren was renting a house when he said that.
I'm contrary because I only exist in this timeline, I don't have to be an advocate or a detractor of it, leaning into populism. Wiser to come to an understanding of what the market one exists in is, how it's working, where it's going, than pass moral judgement, or somehow expect commerce to act in a way to my own liking.
by Pa1nter | 20th May 23, 12:55pm - I wouldn't have advised anyone to take up any substantive financial responsibilities since March 2020
The question I have is, in order to utilize your understanding of the market to help others on here make informed financial decisions, when in 2020/21 did you warn others?
Warren also says buying is own home was the best financial decision he ever made. Bug difference between FHB who have a minum 30plus working years to pay their mortgage. And investor who buys a property for yeild and capital gain but the govt brings in more regs to make it not so profitable and or the market drops so the investor bails to a speculator who jumped in like a headless chook and max out leverage and bought ever thing in site. All different scenarios and outcomes
Zwifter, LOL! your sterling performance goes on. Yet another clanger out of the Zwifter "predictions don't need to be supported by facts" playbook. Apart from one or two like minded here, no-one takes what you post seriously and you've only got yourself to blame for that.
What is obvious from reading your posts is that you never listened and hence you paid the price for it. Anyone who bought a house even a few years ago now hasn't looked back. You get the house, pay for the house then you get the TD. You don't spend your life with a TD waiting and actively promoting a fire sale on housing.
How about the true version. At the tender age of 32, wife 27, after flatting in a damp one bedroom for 6 1/2 years, we bought our house in 1997 outright with substantial savings (yes we really saved up and paid cash for our home). We raised a family, post some initial financial support, our two kids are now independent adults in their own right. Having never run our financial affairs at a loss - enter the term deposit/s and of course our Kiwisavers. My wife and I are both in full time employment.
Hope this helps clear the air of any baseless assumptions that will only draw poor conclusions.
Wait. You'd talk to your bank about lending ability? I thought borrowers were on their own in this decision. All the banks are going to do is apply some arbitrarily thumb sucked test rate to your application, then go "oops oh well" when they're offering to refix you 12 months later at an interest rate considerably higher than what you were tested at.
A very small percentage of severely overleveraged people are going to feel massive pain, but for the rest life will go on as normal. I see a few relative bargains coming up over the next few months, but they will be snapped up by the rich who have cash to add to their already extensive rental portfolio.
Zwifter, even if the most optimistic forecast were to come to pass and house prices were to stabilize for say the next five to seven years, they would still be declining when adjusted for prevailing rate of inflation. Fundamentals such as wages need time to catch up. At the moment they're being eroded by an explosion in the cost of living essentials. FHB's have got much time on their side - FOMO is dead.
Be patient Zwifter, some day in the future house price increases on a (pa) basis will once again rise to exceed the prevailing rate of inflation, but that's a long way off.
One thing that keeps getting forgotten is that insurance companies are in the process of doing single address risk analysis in an effort to reduce risk.
There will be another wave in a year or two as insurance gets pulled. This will have massive repercussions.
Think it won’t happen? Do you want to keep paying in to a pool that includes high risk properties? It will just take one insurer to begin the process and offer cheaper pricing. The others insurers won’t have a choice.
with so much wealth in housing the impact of this cannot be understated. I know of a few builds, all in excess of $7m, that will be uninsurable.
As is a little obvious from the recent damage, yes some will drop.
I doubt others will soar. In fact I’d say people might start to consider risks and costs again across the entire spectrum.
Take the Coromandel for example. You have to pick either sea level or slopes. Any soaring property would have to be very well selected. That whole area may just be a blanket ban.
Most places on the east coast of the North Island that are filled with bachs will become tough.
interesting vid in this
https://www.cnbc.com/video/2023/05/29/dave-burt-a-big-short-investor-fe…
When we are giving away so much free money every week in benefits and the ones getting it have no skin in the game in earning a dollar, they do not care about saving it but they like spending it.
How do you think the demand is ever going to get down?
Don't forget we are a nation who loves giving away tax money for free and that creates a monster which needs more and more feed all the time. We do not spend even 1% on our defence and security and still are in debt as a nation. I wonder where is it all going and we are dreaming that we can control inflation. How naieve are the policy makers and the economists.
Why is comments here so divisive, either you hate property investing ie 1-2 house renting out to young people who do not want to live with mum and/or dad, its not a house in remuera. its rental stock nice basic comfy and warm (healthy home) or you want to buy your own house pay the debt for 30 years and pretend you not interested in capital gains because you are OK to just live on pension and your 250k kiwisaver. I love the passive aggresive notion that you just want a home for you and potentially a family. Tell you what life do not work like that you split potentially. Let me assure you when you then sell your family home after a divorce (and of course you would have given your capital gains to charitity/lawyer becuase you just wanted a home and 2.4 kids and a loving partner forever) then start all over at 45, you want to make sure you have a spare property up your sleeve, above is just one example make sure you have a spare bit of passive income or a house. Your best option is to make sure you have a plan B. Why has the middle ground become so muddy and you either left or right, nothing in between.
Why are you butt hurt? Rampant property investment has been very damaging to society. I'm not talking about genuine investors looking to buy a rental property with cash (deposit or otherwise).
I'm talking about this equity debt stacking mechanism where people with no money and equity in their home can no money down themselves into a rental. Sure, it's legal and people are doing it to look after themselves, but don't expect others to take joy and swoon about it.
Based on the test rates this is not what the banks think.
https://i.stuff.co.nz/business/132542085/banks-checking-loan-affordabil…
"Economists and the market now believe the Reserve Bank won’t cut the cash rate until October 2024, which is line with the Reserve Bank’s forecasts. “That's a big shift in expectations,” Kerr said"
"ANZ’s economists said there was a real risk that the Reserve Bank would have to raise OCR beyond 5.5% this year"
40pc pay rise for pilots in US sets new benchmark. United Airlines pilots will get average cumulative increases of 10 per cent a year in the deal (AFR)
Non-tradeable inflation is a large contributor to core inflation, but they're not identical measurements. The better thing to do is triangulate across the various measures of underlying inflation - trimmed mean, median, factor model - all of which have showed a plateau or decline across the last couple of quarters. I'd put more weight on this basket of estimates than the non-tradeables figure alone.
There was a good point made by Richard Yetsenga in the latest Of Interest podcast, where he said at this point in the tightening cycle he'd put more emphasis on timely data like business sentiment, capacity utilization etc. over the (very lagging) price indices.
Peter Tulip, (previously worked in the Research Department of the Reserve Bank of Australia and before that at the Federal Reserve Board of Governors) on Sky Business this arvo gave similar views to the above piece. When asked by the interviewer, " So when can we expect interest rate to start falling then?" He gave a quizzical look back and replied, "Falling? They haven't even stopped rising yet. We have probably at least 50-100 basis point left to go". That wasn't what the interviewer expected!
Yes, that's Australia, but given our smaller and much susceptible economy to the unanticipated, it's hard to see how NZ will be any different.
https://www.youtube.com/watch?v=J5c3ZVNE3lw
Found this interesting
What is happening is what I have termed "The Great Price Reset" and its really more about the past 20 years than today.
Compounded we are talking about a 25% reset and catchup from a couple of decades of super effiicient and comptitive supply side efficiences and over supply.
We have a little bit to go where prices are being pushed to catch up to everyone and their is a certain amount of price pushing them as high as you can and see if they stick, eventually everyone will have caught up and some will fall back to more reasonable levels and a new equilibrium or sorts will be set.
Its great news for borrowers, if you have 4m of debt then its affectively just been inflated back by $1,00,000 dollars to 3m over a short 3 to 4 year period.
As wages and rents and then eventually house prices will come adjust to this new level of prices.
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