The enemy - those things known as 'inflation expectations' have decided to behave themselves, well and truly.
And this will come as a considerable source of comfort for the Reserve Bank (RBNZ) ahead of its first Official Cash Rate (OCR) decision of the year next week (February 19).
The key result of the latest Survey of Expectations, carried out quarterly for the RBNZ, shows the level of inflation in two years' time is expected by respondents (mean measure) to be 2.06%, which is down from 2.12% in the last quarter's survey. The two-year timeframe result is the one the RBNZ watches most closely.
Remember, the RBNZ is charged with maintaining inflation between 1% and 3% with an explicit target of 2.0%.
Inflation expectations can be 'the enemy' because if people expect inflation to be high in the years ahead they will set their own prices accordingly - and hence inflation will become a self-fulfilling prophesy.
The RBNZ therefore looks for inflation expectations as much as possible to be 'anchored' around the 2% level and that's where we've got to now. Job done for the RBNZ in terms of public perception.
Actual inflation as measured by the Consumers Price Index (CPI) was running at an annual rate of 2.2% as of the December quarter.
The latest survey results indicate that the perception is the RBNZ will be able to maintain inflation in and around that 2% level in the coming years.
The one slight blip was in the expectation for a year out, which rose to 2.15% from 2.05% in the previous survey. Such a rise was largely expected as some short term rises, in for example fuel, are expected to see inflation lift a little during this year - and the Kiwi dollar has been weak against a strong US currency.
But both the five-year and 10-year expectation timeframes saw drops. The five-year fell to 2.13% from 2.24% in the previous survey, while the 10-year fell to 2.07% from 2.19%.
Westpac senior economist Satish Ranchhod said the survey will leave the RBNZ still feeling comfortable that pricing behaviour is well aligned with their medium-term target.
"That will be welcome news given the rapid changes in the global trade environment and NZ dollar, along with related uncertainty about the longer-term inflation outlook."
Westpac's economists are expecting the RBNZ will deliver another 50 basis point cut to the OCR at next week’s policy meeting, taking it to 3.75%.
"Looking further ahead, we expect the RBNZ will continue to cut the cash rate through the first half of this year, but at a more measured pace. We’re forecasting 25bp cuts in April and May," Ranchhod said.
The data for this quarter was obtained from 42 business leaders and professional forecasters by Research New Zealand – Rangahau Aotearoa on behalf of RBNZ. Field work for the survey was run between the 23rd and 29 January 2025 after the release of the most recent inflation figures. The 42 respondents to the survey is more than has been the case in recent surveys.
The RBNZ will likely have also been encouraged by the survey results on expectations for future levels of unemployment, remembering that the actual unemployment rate as of the December quarter was 5.1%.
The mean one-year-ahead unemployment rate expectation decreased by 14 basis points from 5.22% last quarter to 5.08%. The mean two-year-ahead unemployment rate expectation decreased from 4.86% last quarter to 4.69%.
Expectations of future wage rises also decreased. The mean one-year-ahead expectation for annual wage inflation was 2.49%, a decrease of 32 basis points from 2.81% last quarter. It was the lowest recorded since the March 2021 quarter. The mean two-year-ahead expectation for annual wage inflation decreased by 33 basis points from last quarter’s estimate of 3.16% to 2.83%.
Showing a slight increase was the expectation of house price rises. The mean one-year-ahead expectation for annual house price inflation increased by 81 basis points from 3.04% last quarter to 3.85%. The mean two-year-ahead expectation for annual house price inflation was 4.56%, with an increase of 39 basis points from 4.17% last quarter.
28 Comments
NZD has stabilised against TWI which is a good sign for CPI.
The elephant in the room is Governments inability to form economic and industrial policies that meaningfully raise productivity. Our inflation situation has been stabilised without any meaningful progress towards economic growth. If anything the austerity policy and immigration appear to have exacerbated our productivity weakness.
NZD has stabilised against TWI which is a good sign for CPI.
The mighty Jfoe also uses the TWI to demonstrate the relative stability of the peso. Personally, I think the TWI has huge limitations. For ex, one of the primary limitations of TWIs is their sensitivity to changing trade patterns. F'more, it's not trade that really dictates currency exchange rates. Hence, AUD and NZD falling 50% against JPY during the GFC.
If anything the austerity policy and immigration appear to have exacerbated our productivity weakness.
Yes, because the numerator for productivity is basically wages paid + operating profits made. Those operating profits are harder to come by because RBNZ strangled the economy and Willis slit its neck for good measure. We are also losing jobs in the very sectors that pull our average productivity up because they produce decent profits and wages without consuming too many hours or capital.
The data for this quarter was obtained from 42 business leaders and professional forecasters by Research New Zealand
Good grief. That's an awfully small sample size, which is obviously biased by the inclusion of 'professional forecasters' (Taleb would have a field day poking holes in this).
The likes of Westpac, as well as many others, are underestimating economic weakness.
Today I caught up with an old acquaintance from a major engineering consultancy. The kind of place that does ok regardless of economic conditions. Yet, they are really struggling and have made a significant number of redundancies.
Telling
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