The Reserve Bank (RBNZ) is denying that New Zealand is experiencing 'stagflation' and expects domestic inflation to continue falling as "increasing spare capacity" occurs in the economy this year.
In a speech titled Inflation: the road back to 2% delivered online on Wednesday, RBNZ chief executive Paul Conway said "there’s been a bit of talk" of stagflation (which occurs when prices rise while the economy stagnates).
"I've seen a few headlines to that extent over the last couple of weeks," Conway said.
"New Zealand is not in a stagflationary environment.
"Yes, we are in a slow-to-no-to-negative growth environment but the outlook for growth is slightly more positive going forward and the outlook for inflation is for declines to continue," he said.
New Zealand's GDP contracted in four of the five quarters up to December 2023, with results from the March quarter due for release on Thursday of this week. Economists had mixed views on whether the economy would have expanded or contracted in the quarter. Other recent economic data is suggesting the economy may be going backwards in the current quarter.
Conway said the central bank expects spare capacity to start emerging in the economy over 2024, "after several years of the economy growing well beyond its sustainable rate".
"We expect this spare capacity to feed through strongly into lower domestically generated inflation."
The RBNZ is aiming to get inflation back into its targeted 1% to 3% range by the end of the year. As of the March quarter, inflation as measured by the Consumers Price Index (CPI) was running at 4.0% - after being as high as 7.3% in mid-2022. However, the domestically-generated portion of inflation, the so-called 'non-tradable' inflation has been slower to fall, being 5.8% as of the March quarter.
In conjunction with Conway's speech, the RBNZ released four analytical papers looking at inflation. Conway's speech drew on material from this research.
Conway said the expectation of spare capacity and declining inflation is supported by the research.
"Another study being published with this speech finds that the effect of capacity pressure on inflation, as captured by the Phillips curve, has become stronger over recent years.
"This strengthening in the Phillips curve relationship indicates that excess demand for goods and services and workers from part way through the pandemic was strongly reflected in higher inflation. But it also suggests that remaining inflation could decrease quickly as spare capacity emerges in product and labour markets over 2024."
Conway said that inflation spiked higher during the pandemic due to a range of factors, with a shortage of labour and materials in a period of strong demand being particularly important.
"Broad-based non- tradables inflation has been key in driving medium-term inflation pressures," he said.
"While good progress is being made in bringing inflation back to target, increasing spare capacity in the economy is likely to further reduce inflation pressure going forward. A further easing in the labour market will be a key part of this process. Lower inflation expectations and a lower propensity for firms to make relatively large price increases will help lower inflation persistence," Conway said.
Unemployment as of the March quarter was 4.3%, rising from 4.0% as of the December quarter. The RBNZ is forecasting that it will hit 5.0% by the end of this year.
Conway said that to date, declines in non-tradables inflation have been concentrated in products that are sensitive to changes in monetary policy (including housing-related services). Inflation in this category of non-tradables increased quickly at the onset of the pandemic but is now almost back to pre- pandemic rates.
"We anticipate that disinflation will spread across a wider set of non-tradables that typically take longer to react to monetary policy (such as restaurant meals and ready-to-eat food). Inflation in this category of non-tradables increased relatively slowly over the pandemic and has only recently started to decline. This decline is likely to continue as the labour market continues to ease.
"Some non-tradables respond only slowly, if at all, to changes in monetary policy. For example, inflation in some administered goods prices will fall with a delay; for example, excise tax is indexed to CPI. Prices for other non-tradables in this category – such as insurance – have been slow to respond to restrictive interest rates and the pace of increases may only start to wane once other factors – such as pandemic and weather-related disruptions – have run their course."
Conway said that overall the RBNZ expects to see slowing inflation spread out across a greater share of non-tradables and the extent of large price increases across CPI groups to return to pre-Covid-19 averages.
He said the research published by the RBNZ indicates that excess demand for goods and services and workers from part way through the pandemic was strongly reflected in higher inflation.
"But it also suggests that remaining inflation could decrease quickly as spare capacity emerges in product and labour markets over 2024.
"Second, we expect households and firms to increasingly build lower inflation expectations into their wage- and price-setting decisions. Because inflation expectations can become self-fulfilling, lower inflation expectations will help reduce inflation persistence."
Conway said the RBNZ research had found that above-target inflation over recent years prompted people to pay more attention to recent inflation and to update their inflation expectations more frequently. As high inflation expectations become widespread, workers are more likely to bargain hard for wage increases.
"High actual and expected inflation also makes it easier for businesses to increase their prices. Reserve Bank research finds that businesses are more likely to increase prices by more, and more frequently, when inflation is high.
"These behaviours reinforced upward momentum in headline CPI inflation over recent years. But the opposite could occur as headline inflation continues to fall. Recent falls in inflation expectations are welcome in this regard and will help embed lower inflation persistence going forward," Conway said.
130 Comments
https://thespinoff.co.nz/podcasts/when-the-facts-change
3rd one down?
Yep 14-June-2024 - Why is the Reserve Bank continuing to hold the OCR?
RBNZ Chief economist Paul Conway joins Bernard to explain why it continues to hold the OCR at 5.5% and if this approach can make an impact on sticky inflation
Although NZ is seeing disinflation, there are still a number of global inflationary drivers. War, the worsening global geopolitical situation, supply chain shocks and climate change are all inflationary. So even if we get inflation down more, there are risks of global factors pushing it back up again. On the home front, high migration, rising council and insurance costs etc are all inflationary as well. NZ is currently experiencing a period of stagflation in my opinion. How long that lasts is anyones guess but inflationary risks remain and will for sometime yet.
It's relevant to learn from the past, understand the causes of our current predicament and ensure that people understand that the OCR is not considered very high right now, so that they think more critically about taking on debt and the risk that come with it. I can't see a downside to that :-)
The issue with using historical value it doesn’t take into account the the increase in the amount of debt. If borrowing level were flat then using historical ocr values would be relevant. There has been a shift in debt borrowing levels in NZ which does change the way it should be viewed
Indeed, therefore if we look at the behavioural impact of previous OCR shifts and the economical climate at the time, then compare to today with the different factors which you mention, we should do better to understand, plan and predict the most appropriate timeframe for behaviours to change in business and consumers, and hopefully inform ourselves to make appropriate financial decisions at an individual and national level.
before 2009 the OCR never went below 4.5% since inception, immigration was pretty much running at 20-30k per annum, sometimes negative.
after that year (around GFC) NZ decided in its wisdom to achieve growth by lowering the OCR and increasing immigration. A very lazy and short sighted approach. As a result we have built an economy dependent on house prices rising - and to achieve that we need immigration to be a large net +ve number and credit to be super cheap.
The problem is that we got addicted to a false belief that this new superstar economy was somehow real... even before covid times things were getting pretty badstructurally - but then we smashed the OCR down to a really silly level and printed loadsa money.... so house prices rocketed and demand hit stupid levels even while immigration numbers stopped due to lockdon.
NOW - we are in a crisis - because to stop inflation (and stop the infrastructure and public services from collapse due to adding so many people and not enough investment) we have to keep house prices low (reduce equity growth) and make credit expensive. AND we gotta SAVE the NZD (which has dropped about 13% in the last 15 months). So we gotta keep the OCR where it is and even when it moves its gotta stay around 4.75 at the bottom (we cant just drop the ocr so we all hve money again and go back to the fun days of the last 8 years - coz we would spend it again) and we now gotta build a new proper economy in the new economic climate. AND somehow we gotta stop all our smart kids (who can see NZ is a crock of the proverbial) from leaving for a country that already has a successful economy (Aus is pretty close) else we will have noone left to save us.
overall.... rbnz (and govt) is setting the scene to tell us the OCR is high to stay, houses are gonna drop in price, tax income is down so we gotta spend less and so on. basically we are heading for a pretty gloomy decade -> meaning after our 10 year party we gotta have a hangover. basically nothing ocr wise is goinna change much until our habits built in the boom are smashed. by the time the ocr drops noone in their right minds gonna see houses as a good investment
Some other results will be pressure on local govt to kill spend too (coz peeps cant afford it and will vote for budget cuts).. another will be a sharp drop in immigration - coz as people are unemployed and desparately need jobs they wont want immigrants taking those jobs...
start an innovative export business, or move to oz
"Until the 1970s, many economists assumed a stable inverse relationship between inflation and unemployment. Prior data had supported the idea that unemployment fell as inflation rose, and that unemployment rose as inflation fell. Stagflation in the 1970s presented a unique economic challenge: a combination of slow economic growth alongside rapidly rising prices, challenging prior assumptions..." https://tinyurl.com/259tzux9
This isn't the 70's. But neither was the 70's, until it was. Yes, 'things' are different today, in so many ways, except the one misguided, convenient belief - that as unemployment (call it Spare Capacity to be trendy) rises, 'inflation' will fall (NB: CPI rises not 'inflation'. They are a result of Inflation, which is basically more money - Debt - being created than productivity can justify.)
"Conway said that inflation spiked higher during the pandemic due to a range of factors, with a shortage of labour and materials in a period of strong demand being particularly important."
Whaha ha. Ignore the main culprit: excessive money printing globally in the Western world.
Making the lower and middle classes feel rich.
For them only to be able to spend it at the big corporates as (medium) small businesses were all locked down.
And now the lower and middle class feel have been/are being punished (taxed) for this money printing scheme through inflation.
Again, paying the mighty corporates.
Love capitalism, hate corporatism.
Yes money printing potentially caused some of the inflation but key factors were:
a) Supply / demand inbalance as global supply chains struggled to recover from covid19
b) Monoploy and oligopoly businesses simply putting up prices to retain their profitability in the face of no/little competition
The inflation surge was across all western economies, if not the world.
It seems to be to leave interest rates at very low levels, set price controls (not sure how you back those out), and hope it all works out.
Agree but that doesn't make Jfoe's opinions and explanations any less articulate and / or thoughtful.
How does suppressing the price of money solve a playbook based on suppressing the price of money? I don't think it does. It's just a short-term fix until everything eventually gets crushed under the weight of its own absurdity.
I have listed some before (and will try and find links), but a lot of what I would advocate is covered off in here:
https://legrandcontinent.eu/fr/wp-content/uploads/sites/2/2024/06/Weber…
I would add a job guarantee scheme, and, for NZ, a huge effort to develop the energy infrastructure we need to achieve the energy sovereignty we need to forge an independent economic strategy.
I do not advocate 'low interest rates' forever at all - we should just pick a rate and stick to it, using targeted premium / discount rates as necessary to achieve our goals.
Cheers. And I will find time to read through this. I have a few issues with Weber, mainly because I think she doesn't understand well about microeconomic issues like how private companies set prices and the trade offs of their actions in perfectly competitive markets.
Cheers back. I like Weber's work a lot. She builds on some solid foundations - for example, the work that Blinder and Rudd did on how private companies really set prices and the trade offs of their actions in real-life markets. They found to the dismay of economists everywhere that microeconomic models do not reflect how prices are set in the real world at all.
Economists' models on microeconomics can be limited. Real-world application is far better. For ex, I sell Coca Cola. If I raise my price by 5%, i need to understand impacts on market share - volume and value, demand, etc. It's far more nuts and bolts than economic modelling and is all about trade-offs. Technically, Weber will be able to understand these things but her work is less useful from a commercial POV IMO.
Have you listened to the Odd Lots podcast episode on Pepsi and Coca-Cola pricing during 2021? When Pepsi had to leave Russia they had a revenue gap to fill, so they decided to nudge up their prices. They didn't lose market share so they nudged up their prices again. Coca-Cola worked out what has happening and nudged their price up too (and so it went on). This price over volume strategy is increasingly commonplace.
Yet in other developing markets, Coca Cola cannot get away with it. There is a price point where consumers are unwilling to pay.
BTW, the Coca Cola brand is not in Russia anymore. They own a subsidiary and have a different cola product on shelves.
I will track down the podcast.
The RB always has a subtle term for economic destruction.
"Increasing spare capacity" = beat consumers and SMEs into submission until it's too late.
https://www.rnz.co.nz/news/business/519943/businesses-shut-up-shop-as-c…
"The RBNZ is aiming to get inflation back into its targeted 1% to 3% range by the end of the year" - that feels like a given considering there is a 1.1% quarter and a 1.8% quarter to fall out by September. The only snag I see at the moment is rates and insurance increases, and some kind of imported inflation change like fuel or war.
Is it possible we see inflation get back in range this quarter (announced mid next month)? Currently 4%, 1.1% is dropping out, this quarter I believe food prices have actually dropped due to fruit and veg and fuel seems to be down, could we see a 0.1% quarter and a 3% annual inflation? And if so, why is the OCR so much higher than the RBNZ neutral rate?
Just incredibly terrible stuff.
You have a pretty simple island economy where people buy and sell imported stuff, export some things, pay wages to workers, hand over profits to shareholders, borrow from banks, pay interest to banks etc etc.
Now, let's say that you have worked out that the economy has final consumption expenditure of around $300bn per year. So, do you put together a simple model of this little island economy and work out what happens when the price of the $100bn worth of stuff you import goes up by 27% - with particularly strong growth in the price of the fuel that economy runs on?
No, of course not! Why would you do that when you can use some fantasy reckonomics models to come up with some wildly inaccurate results? I mean it is not the accuracy of the models that matter right? What's important is the conclusion you need to reach - that inflation was the inevitable result of monetary policy not making tens of thousands of workers 'spare' quickly enough. The villain is always the worker trying to get a pay increase to match the cost of living.
Incidentally, if you do put together a crude model that reflects how things actually work, you get pretty accurate results - energy and food prices going up and infecting other prices in 2021 (boosted by excess profits), wages responding slowly (kicking off rent rises later), and the service sector bringing up the rear as they pass through cost increases to consumers. The model gets even more accurate from 2022 if you add higher interest costs in as a business cost.
As Friedman said," inflation is always and everywhere a monetary phenomenon".
But if your model is predicated on an ever expanding money supply what can you expect?....'inflation' is baked in, it is the level that causes disagreement.
How do they (attempt to) control the growth of credit? (when 'the market' does not)
I struggle with the idea that less money in circulation will suppress prices - although clearly cheap credit fuels the price of speculative assets like houses! I can see how too much money in the economy would be relevant to inflation if there was barely any money 'left' and / or money was distributed evenly across households. However, our economy is geared to very quickly move any injection of new money (from banks or Govt) into the pockets and then savings of wealthy people (onshore or offshore). Look at our velocity of money (how many times each $ is used before it is saved / taxed / or used to repay loans) - it's been falling for years. I don't agree with Michael Reddell (ex-RBNZ) on much, but his views on money supply are worth a read.
"Look at our velocity of money (how many times each $ is used before it is saved / taxed / or used to repay loans) - it's been falling for years."
Rich people are known for hoarding.
And as the numbers of extremely rich people has grown - and the amount of their vast riches with it - that's not a difficult phenomenon to explain (albeit there are other less viable theories to explain it).
For those unfamiliar with this, consider Apple shares. The vast sums locked up in Apple shares are seldom converted to cash and spent by the people that own them. Instead they are used as collateral so new money can be created. But the amount of new money created is less than the value of the shares. The difference is an example how wealth gets hoarded. (Sorry for the layman's description.)
@Chris....'saving' aka known as investment. Those who have benefited from property valuation increases over the past couple of decades have done what?...'invested in more RE (at increasing valuations), consumed, supported SMEs...and any TDs, bonds were 'reinvested' on their behalf....some may have found its way into productive industry.
Savings?
"'...'saving' aka known as investment. "
No.
Saving is not investment.
Saving creates nothing directly.
The goal of investment is to produce a 'product' from which ongoing revenues / profits are derived.
i.e. investment seeks far higher returns than saving. The two are very, very different.
A nation of great savers will be beaten - in short order - by a nation that invests.
Quantity x velocity....reduce either/both and the ability for prices (in aggregate) to be maintained becomes impossible.
As I have said before our current issue is one of distribution...the reason demand has taken so long to react to RBNZ policy is the massively unequal distribution of wealth and income...wealth and income largely derived from RE (inflation)....the oft touted 'wealth effect'...so the many feel the pain of 'cost of living' increases (as do consequently SMEs without market capture) but those enjoying asset inflation do not...add in a supply shock and the bubble bursts.
Risk of default (aka money destruction) is supposed to constrain the banks ....but in a bubble all restraint is lost.
Very belatedly, enter the regulator.
Once again you are ignoring the data that clearly shows that price increases in goods and services respectively correlated with increases in consumption. The exact opposite of what we'd expect based on your theory that price increases were supply and/or cost driven.
Durables demand went up because of monetary stimulus and limited options to spend on services during pandemic restrictions. When the restrictions were removed and rising interest rates started to deter big durables purchases, services demand rebounded with a vengeance.
It's hard to trust that you're arguing in good faith when you persist with arguments that aren't backed by data. And you spend most of your time promoting OCR cuts which - without some very good policy changes accompanying them - would make things worse. And I know you do have some good ideas for what to do alongside OCR cuts, but you barely ever mention them so that's not the message that sticks with people...
I really struggle to see that demand then price rise pattern. What the data appears to say is that goods prices went nuts when the price of imports shot up - exactly as you would expect. Businesses got hit with extra costs and they passed those costs through to prices. The demand story is very difficult to see - espeically if you are claiming causality. What data should I look at that is as compelling as the cost pass-through data?
Incidentally, I don't think I have ever 'promoted cutting the OCR'. I just think the whole medieval monetary policy thing is a nonsense.
Silly question time ...
Is artificially entering the markets to put people out of jobs to create "spare capacity" an example a free market in operation?
Or is it market-distorting centralized planning - that's not much different to how some versions of communism used to operate?
I'd say its quite a bit different. They are only setting interest rates, and they are doing it to maintain the value of the fiat currency they control. I highly doubt a free market fiat currency would work very well, look at Bitcoin for example, super inflationary / deflationary.
You can't let the free market determine salaries mate! No, no, no! What would happen then? The poor sods that have to sleep in sheds and pick fruit for 8 hours a day would get paid more than the policy advisors in Govt agencies! The care workers doing night shifts in rest homes would be paid more than nurses doing day shifts. Just think what that would do to the price of stuff! Completely untenable.
I don't follow you... The RBNZ are not interfering with salaries, just interest rates. The fact that they use salaries as a measure of where inflation is heading is just common sense, if salaries go up significantly of course we will have inflation. If my pay went up 1000% I would spend a lot more money and create both supply and demand pressures.
"... if salaries go up significantly of course we will have inflation."
That's totally dependent on what people do with the money. History is awash with examples when salaries went up dramatically and there was no inflation. Almost all of the Asian tigers are examples of this - starting with post war Japan.
"If my pay went up 1000% I would spend a lot more money and create both supply and demand pressures. "
Ignoring the Reductio ad absurdum ... you're not not everyone. I would indulge my hobby and build more dwellings, i.e. I'd invest it in creating new things. Many - including our funds industry - would buy overseas shares / bonds which would help our structural balance of payment problem.
That sounds great. If the RBNZ printed $1 trillion each and handed it out, we also wouldn't get inflation?
By they way, I don't think I used reductio ad absurdum, it was more proof by extremes which is something I very much like to do. Do you know the correct term for this?
"If my pay went up 1000%"
"If the RBNZ printed $1 trillion each and handed it out"
Both are fine examples of Reductio ad absurdum arguments.
If you want to legitimately use "proof by extremes", might I suggest mathes or physics as places to start.
Both are far reaching examples to prove a point, but that's not to say that costs have not gone up 1000% in the past in parts of the world, therefore it can't be taken as completely invalid. It all comes back to human psychology and behaviour, the driver of everything.
That's totally dependent on what people do with the money. History is awash with examples when salaries went dramatically and there was no inflation. Almost all of the Asian tigers are examples of this - starting with post war Japan.
Wrong. Inflation in post-war Japan and Korea; post-independence S'pore; Vietnam has always been evident.
Japan Inflation Rate 1960-2024
Edit: This one goes back to 1956 (and includes M2 as I referenced the money supply above): Japan money supply and inflation
Are you denying that real household incomes and real house wealth went up in these periods?
No. I'm denying that there was "no inflation." Economic development in post-war, post-independence countries and emerging markets typically is illustrated by income growth.
In fact, harnessing inflation is a key consideration in East Asia.
Oh, they absolutely are interfering! Their theory of change is very clear:
- They assume that inflation is a clear signal that demand is exceeding our economic capacity - caused by people / businesses / Govt bidding up the price of scarce goods, services, labour
- Their preferred intervention is to increase interest rates to reduce business and household disposable income, thus reducing demand in the economy, and increasing labour market slack (creating more spare workers)
- The idea is that lower demand will make businesses compete for fewer customers (lowering prices) and, critically, make workers accept lower wages for work, thus preventing workers being able to pay higher prices anyway
The impact of creating lots of spare workers is that workers have to accept crappy, low paid jobs because that is all that is 'left' for them. If we had a surplus of jobs relative to workers (see most of 1945 to 1970) then companies would have to compete for workers, and wages would be higher for crappy jobs that people don't want to do (night shifts, care work, hard labour in the fields etc).
“Interest rates have to be held high enough so that nobody will – so few people will invest and so few people can buy homes, that there will be a depression. The depression will lower employment and wages will fall. The solution to any problem is lower wages.” That’s the IMF’s principle. That’s the basic principle of a bank-run economy, no matter what the question you ask, I have the solution: lower wages, lower living standards. Hudson
Could you explain why you believe hyperinflation would have occurred had the RBNZ not raised interest rates?
Perhaps even address what would have happened if the RBNZ had tightened the bank's capital ratios instead so our banks could lend less?
Or perhaps if government had temporarily increased business and upper income taxes to stamp out greedflation and target those driving inflation?
(Sorry JimboJones, but I take issue with people who present a false dilemma when trying to justify incompetence.)
I am not saying hyperinflation would have occurred, but it becomes a bit of a risk when inflation is getting to that 7%+ level. If the OCR was still at 0.25% I doubt we would get back to the target band this year.
Wouldn't tightening the bank's capital ratios also lead to higher interest rates? If the banks have a small amount of money to lend they will set the price of that lending to match the demand.
I don't think inflation is binary, so if we were to use tax take as our inflation control mechanism then the government's tax take would be all over the place. They couldn't plan for anything. The last 15 years taxes would have been incredibly low to combat deflation. And who then sets interest rates? The RBNZ sets a permanent fixed rate? Or its left to the market, meaning it could swing around even more than it has?
Should we study new ways to create price stability - absolutely. Should we throw away the current manual the minute inflation hits and come up with new ideas on the fly - no way.
We all knew the rules when we took on debt that the RBNZ could increase interest rates to combat inflation. To then say "bugger the rules, bugger inflation, bugger the currency, lets come up with something new and hope for the best" would be completely unfair to those that have money and expect the RBNZ to do their job of preserving its value.
" if we were to use tax take as our inflation control mechanism then the government's tax take would be all over the place. They couldn't plan for anything."
I used the word temporarily. And government need not spend it - they could use it to pay down debt - debt get's very expensive when everywhere else in the world is raising rates. In effect, NZ would be counter-cyclical. Not a bad way to be.
Wouldn't the end result be similar? People's tax burden goes up to the point where they can't afford to live. If they were to only tax companies, wouldn't those companies just pass it on, causing more inflation? And if the cost of debt remains the same, its quite possible that people or companies pay for this tax increase through new debt, potentially making an end result of 0.
Incidentally I raised this idea here a number of years ago. I do like the idea of it only paying government debt - however it could have the inverse consequence of governments raising a lot more debt than usual knowing that inflation will pay it off another day. That debt could then cause inflation!
As I said it would be good for the RBNZ or government to look into alternatives. Even just forcing banks to put vulnerable people on longer term loans would be a simple change that would have prevented a lot of harm. But I don't remember anyone really discussing this topic until it became too late.
I used the word temporarily.
Consumers and businesses respond quite differently when they know something is temporary.
When government is targeting greedflation using taxes it become very, very public that greedflation is involved in headline inflation figures. Consumers become very vocal about price rises and the culprits (businesses) become the target of their ire. Thus for a business to legitimately increase prices they need to come out with a believable story that consumers (and governments threatening price controls) will accept.
"Wouldn't tightening the bank's capital ratios also lead to higher interest rates? If the banks have a small amount of money to lend they will set the price of that lending to match the demand."
In time it could lead to higher interest rates. We saw this back in the 70s when monetarists believed all that was necessary was to control the growth of the money supply and everything would automatically fall into balance. (It didn't.)
And in the very short term (weeks, maybe months) banks may respond by hiking rates as they scramble to maintain higher capital ratios but they're more likely to not re-lend monies repaid. (I'll incur, once again, the wrath of the MMTs for using those words.)
But in the short term it's mainly a shot across the bows of those creating new money (the banks) and a short term credit crunch.
Once again, the key word is temporarily.
I should note at this point the RBNZ is trying to adjust a few of these capital controls and the banks are squealing. They claim borrowing will become more expensive. Orr is calling that b.s. I tend to side with Orr on this. But I'd like to see the capital controls we have (and some new ones we really need) adjusted much more frequently rather than leaving it all to the OCR which is a blunt weapon only good for killing demand by creating a Recession (while making the bulk of NZ Inc. poorer - but the very rich even richer - in the process).
"I am not saying hyperinflation would have occurred, but it becomes a bit of a risk when inflation is getting to that 7%+ level. "
Does it become a risk? Lots countries are doing fine with inflation at that level. And have done for years.
For hyperinflation to occur a whole bunch of other factors must also be present. NZ had none of those. None at all.
"If the OCR was still at 0.25% I doubt we would get back to the target band this year. "
You sure about that? Tax works far, far faster than the OCR ever can.
100% right.
It was mind bogglingly stupid. If they'd studied the economic effects of the Spanish Flu of 1918 they'd have been far more circumspect.
What was funnier still was the RBNZ threatened to take the OCR negative. Imagine an OCR of minus 1 percent. They issued banks with an advisory saying banks should be ready for it. Real economists had a lot to say about how ridiculous that idea was. Would a bank continue to lend at 0.1% or even 0.5%? They might. But they'd be very, very, very careful to whom they lent it.
ABSURD.
There is a lot of non-tradeable inflation that the RBNZ can do nothing about.
a) Local government rates increases > 10%
b) Prescription fees etc
So the RBNZ screws down too hard on tradeable inflation and sends people and their families to the unemployment rubbish tip.
Meanwhile central government either causes the non-tradeable inflation or does nothing about addressing it. e.g. the massive subsidy the crown gets not paying rates.
Classic definition of stagflation (or recession-inflation) is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high.
The only missing piece in 2023 was a high unemployment rate, 4 of the 5 last quarters showed negative GDP and inflation was greater than 5%, yet unemployment was less than 4%.
However it is possible NZ had an "artificially low unemployment rate" boosted by creation of jobs within the public sector and the construction sector (building the current oversupply of houses, a building boom driven off the back of tax subsidies) - people were employed but they were not generating any real GDP for NZ.
Hence we might not be in stagflation - but there would be a good argument to say if the previous government hadn't created so many jobs in the public service - would unemployment have been higher and hence in 2023 we would have been in a period of stagflation.
Maybe we had or would have had a short period of stagflation. But inflation is no longer high or increasing so it was very temporary. To me it is real stagflation if the economy has cooled and inflation is still raging out of control, but in our case once the economy cooled inflation dropped (potentially by design or potentially a fluke).
I have been meaning to have a good look at the unemployment figures. I think there was a change in MSD policy in 2018, which basically meant more people went into work because they knew that MSD would top-up their salaries with benefits. You can see this in the data - unemployment numbers dropped by around 20,000 and benefit numbers jumped up by the same amount.
The real rate of unemployment in NZ = 11.2%
https://www.stats.govt.nz/indicators/underutilisation-rate/
Nope. if you want to know how many 'bludgers' there are you use the benefit recipient numbers, which are totally different to the unemployment and underutilisation numbers. MSD wrote a whole report on why they are so different. It's a fascinating read. Lots of people who are unemployed don't claim benefits, most people claiming benefits are employed (you get the drift).
There are no dole bludgers.
A capitalist society with an OCR and minimum wage requires unemployment.
i.e. its government policy that creates the unemployed.
Viable alternatives are government guaranteed jobs or a UBI.
We are going to need something once AI fully arrives.
Yes, its likely, but not proven:
a) immigrants coming into NZ are generally filling low wage unskilled jobs
b) the unemployed in NZ > 1yr on the dole are more likely to be poorer unskilled NZers
c) thus the immigrants could be outcompeting these unemployed NZers for jobs.
Aside: NZ is running unsustainably high net inbound immigration leading to a social crisis, housing crisis and infrastructure crisis. Successive govts use it to sugar rush economic growth, GDP, rather than trying to maximise GDP/capita with a lower net immigration rate which would be in the best interests of NZ Inc.
AI (another immigrant) arrives every day. More of a problem for current New Zealand workers than the other type (hype) of AI will be for a while. Remember New Zealand businesses don't invest capital in productivity improving equipment or software like AI. They prefer the more flexible investment in AI. Preferably via a labor hire company with no commitment.
Paul, you're saying the same thing using different words.....
I'm not a sailor however I suggest we're becalmed.
Instead I'm a rural common bugger saying it's not science, it's common sense.
Make it to satisfy a market, sell it and let the market, on sell it..... even your financial markets work the same principles......
This song aged well. Blam, blam, blam https://www.youtube.com/watch?v=2HVogejKx_c
When an economist makes a statement like this
"Prices for other non-tradables in this category – such as insurance – have been slow to respond to restrictive interest rates and the pace of increases may only start to wane once other factors – such as pandemic and weather-related disruptions – have run their course."
you have to wonder about his/her grasp on reality. Weather-related disruptions will not be running their course, FFS.
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