By Gareth Vaughan
Central banks' use of monetary policy to fight inflation is working, but in New Zealand we need to look at evidence demand and prices are being impacted rather than current inflation data, says ANZ Banking Group Chief Economist Richard Yetsenga.
Speaking in the Of Interest podcast, Yetsenga says news of an inflation fall in the United States suggests the Federal Reserve is close to an extended pause having increased its Federal Funds Rate to between 5% and 5.25% from 0% to 0.25% since March 2022.
US consumer price index (CPI) inflation rose 3% in the June year, down from 9.1% a year earlier. Yetsenga expects another 25 basis points increase from the Fed, after which he expects a period of pause.
"It's not obvious that pause will be followed by further hikes, but neither is it obvious that that pause will be followed by cuts. And I think that's a good signal," says Yetsenga.
In New Zealand, where March quarter CPI was 6.7% and June quarter CPI, due out July 19, is expected to be about 6%, Yetsenga says the current inflation rate isn't necessarily the key thing to look at in the inflation fight. On Thursday Statistics NZ said food prices rose 12.5% in the June year, a 35 year high.
"When you've hiked [interest rates] by 400 or 450 basis points, the current inflation rate, yes it's still important, but it's less additive to your information set. What is more additive is can we see the signs that demand and price pass through is being crimped by the policy moves that we have done? And the answer is unambiguously yes," Yetsenga says.
He acknowledges higher interest rates are a blunt tool and may not impact the economy the way we'd ideally like.
"Certainly there are other policy tools available. But in the absence of somebody else stepping up and delivering those other policy tools, it's up to our central banks that have their inflation mandates. And so far I think they're doing a good job at trying to balance getting inflation back to target without crimping the economy too much."
In the podcast Yetsenga also talks about the Reserve Bank of Australia's approach to the inflation fight in comparison to the Reserve Bank of New Zealand, evidence central bank monetary policy is working, whether central banks need more inflation fighting tools, China's "remarkable" 0.0% CPI, and the impact of a higher frequency of extreme weather events on inflation.
"We are talking about deflation there [China]. We need to separate our expectations for China, I think, in the next 20 years [from] what China has looked like in the last 20 years. I don't think those two things will be in any way comparable," says Yetsenga.
Climate challenges, meanwhile, are "a supply side shock which will tend to boost inflation and will tend to worsen incomes. And so it hits productivity as well, and it reduces standards of living."
*You can find all episodes of the Of Interest podcast here.
26 Comments
You overlook the fact that there are many deflationary factors coming from overseas. (They're even mentioned in the article!)
So nope - inflation will be under control - for now.
If we want to nail inflation for good in NZ - we need to constraint the retail banks' lending to buy houses! It vastly increases the money supply and the value is extremely questionable. Even more so as we live on a massive fault line that could destroy the 'wealth' in a the blink of an eye.
12 to 15% pay rises in the NZ pubic sector to over 100,000 nurses and teachers and others as an example wont help the NZ inflation fight. In the UK the conservative PM has said they have to have reality, its 6% and thats final. https://www.reuters.com/world/uk/uk-teachers-doctors-set-6-pay-rise-tim…
And what rises there are now will be based on the baked-in rises of last year (YoY stats). So even as Inflation 'moderates' it's now being valuated based on the entrenched rises. And marginal though it may be at this early stage, compounding mathematics is a wonderful thing.
Yes some things are settling down but not all. Rates rises 6 to 22% kick in August, and the 10% petrol and diesel rise will flow through the economy over the next 3 months. We may get inflation at 5.9% next week if we are lucky but still a lot of water to flow under the bridge in the next 6 or 8 months. RBNZ will not want to open the spending gate anytime soon.
And if you got an inflation matching pay rise last year of 7.3% (July'21-July'22) on your, say, $100,000 salary to make it $107,300, don't you now need another one of 5.9% (July'22- July'23) - $107.300 +5.9% = $113,630 just to keep up; a cumulative rise of 13.63%? You do if you want to have a side order of veges with your dinner tonight.
Still another hilarious reply. I guess it based upon you not being an employer? Most employers are using the line that asking for a pay rise equal to inflation is just making things worse and they have to stop it. (And many employers are quite happy for employees to vote with their feet as they want to reduce headcounts anyway.)
Nice interview Gareth. I did find myself swearing a little in the opening minutes when Richard stated confidently that the Fed's monetary policy was the primary driver of cooling inflation - I can see where Zollner's extreme hawkish position comes from now. The key question in debates overseas is: "Through what channel have higher rates started to slow prices?" The answer when everything is thrashed out and all channels are considered seems to be 'expectations' - aka fairy dust. Prices have come down because the disruptions and behaviours that caused them to go up have subsided - commodity price shocks amplified by traders being traders, opportunistic / margin-protection profiteering etc.
I was also blown away that Richard thought that NZ consumer demand was still 'filling restaurants on a Tuesday!!!" Unlike Aus, NZ has a huge trade deficit - so we are losing cash to overseas savers at a rapid rate, and with net bank lending and net govt spending near zero, this is a recipe for a rapid downturn, which we are just seeing the start of (masked temporarily by increased inward migration).
"NZ has a huge trade deficit - so we are losing cash to overseas savers at a rapid rate"
Spot on. And adding to that by encouraging more non-productive Private Debt, enabled by rising property prices, is the very cancer that needs to be removed from our economy. And harsh though it is, the cost of Debt is the treatment. Because without that monetary chemo there is no chance we'll do it otherwise. Decades of 'getting away with it' has led to complacency.
Out of interest, between the two of you, what would be a preferable method of taming/preventing this kind of inflationary environment in NZ?
Agree OCR is a blunt and skewed tool when savers are rewarded and many workers are paying through their nose in PAYE and interest. It’s hitting many of the wrong places and a cause of renewed nontradable inflation. What other tools would work? Better taxation, disincentives for unproductive use of land, price controls..?
Some form of GST would be the most desirable.
Very hard to administer unfortunately.
By definition it is a consumption tax and when you are trying to change consumption it’s the most broad base tool you can use.
Imagine GST swinging from 5% to 30%. I know when I’d want to be building a house!
You realise mortgage rates negative impacts those with mortgages and rewards savers right? You simply cannot use GST in the same way as it (i) applied to anyone spending and (ii) there is no offsetting on the other side.
Odd that you don't elaborate on the other tools either in this comment or your others. Care to share your wisdom?
I agree on the former (debt for property Ponzi is a disaster) but not with the idea that we need to self-destruct to make it right. We can handle a trade deficit as long as we can plug the difference by exporting Govt Bonds (as we do now). But we absolutely need to direct credit and govt investment towards the things that get us back on our feet economically and ecologically.
And then there's this kind of inflation:
https://www.nzherald.co.nz/nz/the-coffee-club-lynnmall-cafe-roasted-for…
From a piece in the Aussie today, press on the departure of their Reserve Bank governor.
If Lowe erred, it was in waiting too long to start raising rates. McKibbin gives credit to the Reserve Bank of New Zealand for seeing inflation earlier and acting sooner....But....other than NZ, “all central banks made similar mistakes”, says McKibbin, distinguished professor of economics and public policy at ANU’s Crawford School. Lowe’s main misfortune, McKibbin says, was to have his seven-year fixed term expiring just as public and political criticism reached a crescendo.
https://www.smh.com.au/politics/federal/the-political-execution-of-a-fe…
I believe there has also been a lot of 'seller side inflation' meaning increased profit taking via price increases. These are price increases that sellers create not because of costs but 'because they can' in this climate where the population are generally accepting of the fact tha price increases occur when inflation is rampant. I'm a capitalist for sure, but price gouging is a big issue right now. Instead of businesses seeking higher sales volumes to maintain profits they simply accept lower volumes (for now) and ramp up the prices by more than is really required.
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