Kiwibank economists say central banks will ultimately need to have looser inflation targets than they do now to accommodate a "world of rapidly rising, climate-related, costs".
In the latest Inner Kiwi publication, Kiwibank's chief economist Jarrod Kerr said the "structural lift in inflation" makes targeting a rate of 2% in years to come, that much harder.
Our Reserve Bank (RBNZ) has an inflation target of 1% to 3%, with a specific goal of achieving 2%. Just last month RBNZ Governor Adrian Orr gave a speech in which he highlighted that the current 2% mid-point inflation target remains appropriate for New Zealand.
As of the December quarter our annual rate of inflation was 4.7%, down from a high of 7.3% in mid-2022.
Kerr said the impacts of climate change on inflation are "multifaceted, and structural".
"More frequent severe weather events will cause more damage, which will become increasingly expensive to rebuild from and insure against, forcing price hikes in affected industries. The floods and cyclone that ripped through the North Island last year are an unfortunate example. The rebuild cost is estimated at over $13 billion, and growing. Lost crops hurt exports by around $1 billion, and caused a spike in some food prices (like apples). But there are structural changes. Insurance costs and council rates are being marked higher in response."
This structural lift in inflation therefore makes targeting 2% in years to come, that much harder," Kerr said.
"The current war on inflation aside, central banks will have to get a little more creative.
"Looking through large increases in food prices, insurance premiums, council rates and other costs like (re)building supplies, will prove difficult. We’re (inevitably) going to ask the question, is 2% the right target?
"No… Targeting 2% in a world of rapidly rising climate related costs, would require a crushing of non-related costs to compensate. Punishing Peter to pay Paul is problematic and painful.
"We suspect the conversation will shift towards higher, looser, targets. But not just yet.
"Because central banks place an appropriately large weight on their credibility. Central banks need to break the inflation beast that reared its ugly head following over-stimulation from Covid.
"Once the beast is broken, over 2024/25, then we’re going to hear more about climate related inflation into 2026. 'Higher for longer' interest rates will make way for 'higher for longer' inflation targets," Kerr said.
Kerr has referred to this subject previously in an Of Interest podcast.
In terms of the immediate inflation battle, however, Kerr does see the RBNZ as achieving "soft landing nirvana" - doing just enough, and not too much, to control inflation by nudging the economy back to optimal levels.
"Getting inflation back to 2% is seen as the optimal run rate, at least for now. We have seen the heat come out of goods markets and asset markets, like housing. But we need to see a little more heat come out of labour markets, and services. It’s a monumental task. Because using blunt tools to orchestrate a soft landing is not something we see much in history. But it’s one traders are betting on. And our central bank is buying in. Will they get there? We think so. And when they get there, they can unwind restrictive policy, returning to more neutral settings."
Kerr forecasts inflation falling below 3% this year, and he expects it to push toward 2% next year. He is forecasting that the RBNZ will start cutting the Official Cash Rate, currently at 5.5%, in November of this year.
"We forecast substantial declines in interest rates this year and next. The great unwind of heavy-handed hikes will help households and hampered businesses, producing a better outlook. The glass half empty will turn full. 2024 will be a better year than 2023, and 2025 will be better than 2024."
46 Comments
Yes, Kiwibank have been good on this in recent months. Our measured 'inflation' is already being driven by local govt rates (infra deficits + climate resilience), insurance (climate risk), and more regular spikes in food and other commodity prices (conflict, climate, etc). The idea that we would choke the economy and throw people onto benefits when prices go up is plain stupid.
We need more sophisticated tools - ways of recognising transient prices and inevitable cost increases and preventing those prices getting 'contagious' (spreading through the economy via higher input costs).
"We need more sophisticated tools - ways of recognising transient prices and inevitable cost increases and preventing those prices getting 'contagious' (spreading through the economy via higher input costs)"
Which is basically a nonsense statement
The guts of it is we are expanding fiat WAY faster than real output ... its a IOU Ponzi
And someone somewhere has to pay for this decrease in buying power
Boomtown nailed it.
Yes, you can be more exact in monitoring/measuring (using physical measures instead of a keystroke-issued proxy, would be a helluva good start)
But that won't stave off the multi-faceted nature of our dilemma - that's a matter of the Limits to Growth on a finite planet.
Long foretold; no excuses for economists or reporters (there are almost no journalists, by definition) to say they didn't know...
Nah we will be all right - Chinese labourers will keep churning out ever cheaper material goods and that will hold our inflation rate down
What can possibly go wrong
Maybe WCC could import a boat load along with the equipment needed and they could fix the water supply - then sail off home again (because the powers to be in Wellywood dont appear to have any idea how to solve the problem)
No, with respect, this is nonsensical. Let's say we do limit fiat money and credit creation (I will return to this later) and the money circulating in the economy is limited.
Now, let's pick a critical input cost to our economy - steel, solar panels, fertilizer whatever. Assume a conflict somewhere sends these costs through the roof. Would it be a good idea to let this price spike spread through the economy - driving the price level up? Our money supply would be fixed so before we know it, people wouldn't be able to afford to buy the things they need. Far better surely to develop tools to prevent this contagion? Bufferstocks, crown balance sheet etc.
Now, back to the fixing money supply / stopping credit creation. I am actually broadly supportive of degrowth - reducing our use of resources, energy, materials etc, aiming for a circular economy. The implementation is the challenge - and I am not convinced that trying to hold the money supply down is the answer. How many IOUs circulating is the right amount? We currently have about $600bm circulating, with around $110bn in transaction accounts. What's the right amount? Half that? A quarter? Now how do we ensure equality of resource use? Do we all skimp and save while the 1% of top rentiers carry on flying, driving V8s and cooking steaks?
It’s surely less about the right amount and more about the right distribution. Then for so long as we are able to measure these inputs/outputs, we can expand and contract accordingly. No ideas how to actually measure that, so we count numbers on the screen with a 2% target. But ultimately does it matter if the number of dollars in circulation is 1 or 100 so long as it’s distributed meaningfully?
We have a lot of idle hands, and a very large amount of redundant jobs. The better question might be how do we best utilise the population? And how do we disincentivise certain types of activity and how do we determine what those activities we want to disincentivise are?
Then how do we manage trade when we are so deep in the red currently. Tourism, a major money maker for us, will not exist in the same way. But for our food, we either import it or grow it. Either way we need things like energy and fertiliser imports. In a more circular economy surely we need to keep in check with the outside world since we’re an island nation miles away from anywhere.
The problem is our two alternatives of either 1) inflating asset prices and devaluing work vs 2) raising rates and removing monetary welfare, crushing property and reducing employment.
We cannot simply abandon 2) and move straight back to 1).
Looks like we need an alternative option with which to move forward.
Targeting 2% in a world of rapidly rising climate related costs, would require a crushing of non-related costs to compensate.
You could have equally argued against 2% between the financial crisis and Covid-19 pandemic for the opposite reason. We have never moved the target because it's difficult to achieve. For inflation targeting to work effectively people have to believe that the target won't change and reserve banks will set effective rates policy to pursue that target.
The inflation target won't change and it shouldn't change.
Inflation is ravaging poorer communities. I've just seen a news clip of a grandmother, mother and two kids sleeping in a people mover who just moved into a motel room by the airport.
Do you think they care about "climate change"? Maybe they will join the dots, maybe they won't.
Hahahaha, did you seriously just say sea levels are rising???
Oh, It must be really really serious because the leader of the Green Party in Austrlalia has been cutting back on his private jet use. $100k on limousines as well
https://www.spectator.com.au/2024/03/scathing-response-to-adam-bandts-p…
Are you sure you're not confusing rising sea levels with coastal erosion and that the sea level is rising in some parts of NZ but not others?
Regardless, Palmtree referred to the motel being underwater and I'm thinking if you are homeless that's a lower order risk.
Sea levels are dropping in many parts of the country. The land is rising. In some places the land is also dropping, so yes in those areas the sea is rising. Sea level have also been much higher and also much lower in the past. It's a cycle. We can panic about it, or accept it. Either way there is nothing do be done about it. Pretending we are causing it is one way of dealing with it, because you can convince people they can fix it. The reality is this happens over hundreds and thousands of years. So, people can feel good about their efforts to 'fix it', but they will never live to see the day that they actually failed to achieve anything whatsoever as it was a natural cycle all along.
So, people can feel good about their efforts to 'fix it',
On the other side, folk are emotionally invested in denial of scientific inquiry and evidence because it absolves them of any feeling of responsibility for their actions negatively impacting younger and following generations. To climate, pollution and biodiversity loss as to housing.
LOL. How do you imagine SLR manifests itself?
"Climate change poses significant risks to coasts, from sea level rise and high-tide flooding to accelerated erosion and intensifying storms."
https://www.usgs.gov/science/science-explorer/climate/coasts-storms-and…
Of course what they ae saying is true, climate change is real and it has risks. It is just not caused by humans as the climate cult like to tell us.
Lets work through some examples (local ones of course).
i) Was there are large earthquake in Christchurch in 2011, did the sea level rise in Christchurch relative to the land. Yes. Was it climate change, NO. the land sunk by between .5 and 1 meter.
ii) Was there a large earthquake in Kaikoura several years later. If you go there you will see the coast line is out of the water by about 1.5 meters. Is the sea level rising, relative to the land. NO, Did the land rise out of the sea. YES, was in climate change, NO.
iii) Was there are large volcano in the South Pacific that erupted and sent an huge amount of water into the atmosphere ? YES. Did NASA on this very site you are referring to forecast intense rain and storms for a period of time around the south pacific as a result. YES. Was there massive storms in New Zealand and Australia that caused huge damage just as NASA predicted. YES. Did we run around and panic and scream climate change. YES. Was it climate change the way that the climate cult describe. NO. It was a volcanic eruption. Could it have been prevented by tree hugging hippies and driving electric cars. NO.
iv) Was there a terrible fire season in Australia several years ago. YES. Did the climate cult jump up and down and claim climate change. YES. Did they then warn us this would happen every year because climate change is accelerating rapidly and we are past the point of no return. YES. Did the fires also occur the next year and the one following as predicted. NO. They were wrong again.
v) Did Sydney Australia almost run out of water around 10 years ago and have massive water restrictions in place after a few years of drought. YES. Its drought normal in Australia. YES. Does the climate cult claim it;s actually climate change. YES. Did they also say that water restrictions would be forever because the climate has changed and there would be no more rain. YES. Was it true. NO, of course not. Today they have more water generally than they know what to do with. The predictions were completely wrong.
vi) Are there atolls in the South Pacific where the sea levels are falling. YES. Atolls have risen out of the sea since the beginning of time. Are there also atolls in the South Pacific that are sinking YES. Is this claimed as climate change. YES (the atolls that are rising are never mentioned of course).
vii) Did the media show a picture of a sunken Island shortly after the Tongan volcano erupted. YES. Did they say that it was under the water as a result of climate change. YES, of course they did. But, really the volcano exploded into nothing. But, it really was climate change wasn't it.
Point is, all these things have changed the climate. None of them are man made. There are many many many inputs into the way the climate changes. Our 1 or so % makes very little difference whatsoever. After the storms in New Zealand that resulted from the Tongan eruption had finished, we were even stupid enough to try and predict whether the storm would have been more or less violent if we could take the man made portion of climate change away. I mean come on, how pointless is that.
You share my sentiment on the subject however that was not the point I was trying to make which was "Climate Inflation" is going to hit the poor hardest and they have the least to lose. If you are sleeping 8 to a room do you really give a flying fig that it might be 1/2 degree warmer in 20 years?
Oh, for the inflation part, of course this will create inflation. We are panicking and adding costs to everything. Fuel taxes, which lead to inflation on transportation, which leads to increased food prices, which leads to higher salaries, which leads to higher prices for everything else and hence more inflation. More regulation to combat 'climate change' on farms leads to higher input costs, which leads to higher prices. More farm land planted into useless pine forests leads to less food being produced (and a higher fire risk), which again translates into higher inflation. Yes, of course this hits the poor the hardest and that is very sad. The inflation and the resulting poverty and misery will be completely man made, unlike the climate change they will use as the excuse to create it.
True. If it was a genuine emergency they would not be travelling at all. Teams or Zoom would be perfectly sufficient to discuss their issues. Burning tons of the fuel they hate so much to get together and discuss stuff that they already agree on is certainly not saving the planet.
That's a transparently absurd suggestion. If people don't go to where policy is driven in the short term then only the ones who do go there will drive the policy. Simple stuff.
Or perhaps our politicians never needed to travel overseas for trade negotiations et al and could've simply had some Zoom calls.
Activists travelling the globe doing exactly what they tell others not to do, wasting time, agreeing on things that they can never enforce and will never happen is a bit different to pollies travelling around discussing foreign policy or whatever. The pollie stuff is quite important relatively speaking. The climate change meetings are a waste of time, and hypocritical, as well. I mean would you take your neighbour seriously if he said I am going to travel to the other side of the world with 1000 of my deluded friends and we are going to discuss a rule whereby you 'neighbour' will be banned from mowing your lawn, because a) you are using fossil fuel, and b) you could hurt an insect that has made his home in your lawn. You should just laugh and tell him where to go. Some difference, idiots burning fossil fuel discussing rules everyone ignores....
https://www.nzherald.co.nz/nz/politics/inside-treasurys-fight-to-keep-2…
Really good article here from the Herald (I know, I know).
Would be good if Interest looked into this too. It looks like we're planning on paying other countries to reduce their emissions for us. Could be loading future taxpayers with massive liabilities (similar to PPPs) all in the name of trying to continue the status quo.
agnostium,
This issue has been quietly simmering away behind the scenes for some time. The idea that we might pay anything like $23bn to unspecified other countries is so bizarre, that it's really hard to understand the thinking behind it. We should make it quite clear Now that we will not be held to this ridiculous deal.
And the consequences, a lot of huffing and puffing and nothing else.
"Kiwibank economists say central banks will ultimately need to have looser inflation targets than they do now to accommodate a "world of rapidly rising, climate-related, costs".
What a load of drivel. Is Interest and Kiwibank not aware of normalised costs? There are loads of research paper out there that a bank and a financial website should be aware of. It is climate change policy not inter-glacial warming driving inflation.
"More frequent losses due to extreme weather, notably storms of tropical, sub-tropical and extra-tropical origin, when combined and after adjusting for changing societal factors, show no trend over the record length."
Normalised New Zealand natural Disaster insurance losses: 1968–2019
https://www.tandfonline.com/doi/full/10.1080/17477891.2021.1905595
"When aggregated by season, there is no trend in normalised losses from weather-related perils; in other words, after we normalise for changes we know to have taken place, no residual signal remains to be explained by changes in the occurrence of extreme weather events, regardless of cause. In sum, the rising cost of natural disasters is being driven by where and how we chose to live and with more people living in vulnerable locations with more to lose, natural disasters remain an important problem irrespective of a warming climate."
Normalised insurance losses from Australian natural disasters: 1966–2017
https://www.tandfonline.com/doi/full/10.1080/17477891.2019.1609406
"This paper reviews 54 normalisation studies published 1998–2020 and finds little evidence to support claims that any part of the overall increase in global economic losses documented on climate time scales is attributable to human-caused changes in climate, reinforcing conclusions of recent assessments of the Intergovernmental Panel on Climate Change."
https://www.tandfonline.com/doi/abs/10.1080/17477891.2020.1800440?journ…
"Consistent with observed trends in the frequency and intensity of hurricane landfalls along the continental United States since 1900, the updated normalized loss estimates also show no trend. A more detailed comparison of trends in hurricanes and normalized losses over various periods in the twentieth century to 2017 demonstrates a very high degree of consistency."
Normalized hurricane damage in the continental United States 1900–2017
While I agree with KB economists that climate change will drive inflationary pressures, the effects will be spread over so many years that we'll barely notice, and many price increases - if managed well - will be one-offs.
There will be the occasional weather events that we're not used to in NZ, but other places, e.g. the states bordering hurricane alley in the USA, get all the time. There will be 'one off' rises in insurance premiums that'll drive inflation for a year or two. And the inevitable clean-up costs after such events, which again, if managed by 'saving for a rainy day', will result in one-off hikes to place more monies away for such events. And consumer behavior around such events will change. No longer will people pay outrageous prices for kumura because they can't think of any substitutes. Again the USA is an example here, when hurricanes hit and the price of some commodities spike, e.g. shrimp (nod to Forrest), people switch. (Obviously, Stats NZ needs to get a whole lot smarter in measuring inflation as they can't include kumura prices when nobody is buying it because they've switched to other products. The RBNZ is - at last!!! - onto this. Why it's taken so long is beyond me!)
And there'll be the slow burn of price rises as production adjusts to using less environmentally damaging inputs. This slow burn will be spread over many, many years. How much will it add to inflation? 0.5%? 0.2%? Or even less?
And there will be price reductions. Take EVs as an example. They're brand new tech. Someone here likened them to 1980s laptops that cost a fortune. An apt analogy. But they rapidly fell in price while becoming massively more powerful. And the same will happen to EVs. And consumer habits? They'll change too. Smaller cars might become very trendy again. (The 1960s saw the development of the Mini which was itself a response to oil price shocks.) And then there's new tech like high quality and fast wireless internet that means many more can WFH.
We'll change. We'll adjust. Just like South Koreans have been forced to - their 'economic miracle' occurred in 1 to 2 generations depending on how you measure it. Like them, the global population will change. We'll change. We'll adjust. ... And we'll all complain about it. Constantly!
May you live in interesting times. (Old Chinese curse)
We should have 'Higher looser inflation targets.'
Meaning because the wealthy have continued to fly private jets and source and sell fossil fuels... the poor who can't afford much now should starve in the future if climate change results in accelerating inflation.
Are these economists that divorced from how hard it is for the poor right now.
Surely the question we need to consider is.
How will central banks ensure prices for basics for the poor to middle class are kept affordable in the event climate change accelerates inflation and it becomes harder to keep in target bands. Or something to that affect.
Sea level rise is a hoax and conspiracy. We just need to keep building $1 million dollar sand dunes in front of coastal properties everytime there is a storm because it's fun.
EVerVytHiNg iS FiNE, tHIs Is noRMaL
https://www.theguardian.com/us-news/2024/mar/13/sand-dune-tide-beach-ho…
Well I did say the other day that now is as good a time as any to dip one's toes in the property market. Trying to time the market is fraught with danger.
The best time to buy was about a year ago as socialism wreaked havoc with the NZ economy.
https://www.1news.co.nz/2024/03/14/property-values-up-in-more-than-half…
Why would anyone listen to someone who has proven illogical?
The 'economy' was merely humans extracting, 'consuming' then ejecting - at varying timescales, parts of a very finite planet. They chose to do so at ever-increasing rates, and are now in species overshoot.
If you need to believe that such growth can go on indefinitely, expect ever-fewer followers. I just regard it as cranially-flawed. And interestingly, when stuff is put in front of you, to read, you run a mile. Telling, is that.
.
Haven't you noticed the increasing number of kiwis packing their bags and going to Aussie?
It's been huge. And in the meantime the previous socialist government decided in its wisdom to allow hundreds of thousands of Asian and Island immigrants into NZ. What were these people going to do once the destruction of the tourism and farming industries was complete, and NZ was going to grow millions of acres of trees to 'save the planet'?
Build more houses for more immigrants?
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