ANZ chief economist says firms' pricing and cost expectations have risen again 'and are not consistent with' the Reserve Bank's inflation forecasts

There's been a "disconcerting" lift in inflation indicators measured through the latest monthly ANZ Business Outlook Survey.

The survey shows that cost expectations for businesess have risen to the highest level in a year, while pricing intentions have hit their highest level since May 2023.

ANZ chief economist Sharon Zollner said the pricing and cost expectations "are not consistent with" the Reserve Bank's inflation forecasts, although inflation expectations from survey respondents are "well behaved".

"The lift in inflation indicators is becoming a little disconcerting," Zollner said.

"We are highly conscious that we downplayed the message from this indicator in 2021 when it provided a timely warning of an imminent dramatic rise in inflation."

Westpac senior economist Michael Gordon, in a comment on the survey results, suggested that concerns about the impact of the weaker New Zealand dollar on the cost of imported inputs may be a factor in the survey outcome. 

"Perhaps more importantly, firms believe that they will be able to pass on these cost increases: pricing intentions have been drifting higher for several months, and they took a notable step higher in March," Gordon said. 

The Westpac economists are expecting annual inflation to pick up temporarily as a result of the weaker Kiwi dollar, peaking at 2.6% at the end of this year, but otherwise remaining within the 1% to 3% target range.

"In that light, the RBNZ is still likely to deliver the OCR cuts that it signalled for the April and May policy reviews, but beyond that point we don’t think there will be a compelling case for further cuts," Gordon said.

ANZ's Zollner, In comparing the current situation with when inflation indicators began rising in 2021, said that the economy "was in a very different place then", with resources (both people and goods) rapidly becoming scarce all over the economy.

"Today’s flurry of inflation pressure is much more likely to reflect raw material prices, energy prices, and the weaker currency," she said.

"That’s not comfortable for firms, but it’s much less likely to become persistent."

Still, the headline starting point for inflation, "whatever its cause", will inevitably influence the RBNZ’s enthusiasm for continued cuts in the Official Cash Rate, Zollner said.

The OCR is currently at 3.75%, having been cut from 5.5% since last August

"A [further] cut next month looks assured, and a follow-up in May looks highly likely, but a third in July is more of a coin toss at this stage," Zollner said.

"Against a backdrop of increasing global volatility, market pricing of future cuts is likely to continue to wax and wane."

In terms of the overall survey results, business confidence was flat at +58 in March, expected own activity rose 4 points to +49, past own activity lifted 4 points to 1, while past employment lifted 1 point to -6.

"Like last month, activity indicators saw a mix of rises and falls in March but overall continue to portray a gradually recovering economy," Zollner said. 

"Reported past activity (the best indicator of GDP) lifted four points. At a net +1 it’s certainly not strong, but the improvement has been broad-based."

Zollner said the message from the survey continues to be that the business environment is improving but isn’t easy.

"Firms remain confident that better times lie ahead and are positioning themselves to take advantage of that as best they can, but many remain hampered by poor cashflow."