Inflation figures set to be released next Monday (October 18) will again be super hot when compared with recent history.
However, while everyone it seems can agree we will likely see a figure of in excess - possibly well in excess - of 4% for annual inflation, where the big debate comes in is what exactly we are seeing here.
If we go back earlier in the year the theme was very much that global supply chain issues would cause some short term spikes in inflation around the world - but that this would soon cool down, in fact by the end of the year.
In New Zealand earlier this year economists were thinking that inflation would likely top out in the middle of this year some time.
Now, however, the timeframes are being pushed further and further out, with some suggestions we won't see the peak in inflation till early NEXT year.
The Reserve Bank (RBNZ) is of course already reacting. Last week the Official Cash Rate was increased from the 0.25% emergency setting it had been on since March 2020 to 0.5%. Further gradual rises are expected, with economists seeing the OCR likely being around 1.5% by next year.
Beyond the headline figure of inflation next week then, the big point of interest will be the composition of inflation and how long-lasting the impacts might be.
The RBNZ, which is forecasting annual inflation of 4.1% as at the end of the September quarter, will happily 'look through' high short-term inflation figures if these are seen as a temporary spike due to one-off issues - such as the supply disruptions the world is seeing.
However, the trouble starts if those 'one-off' disruptions set off a second wave of inflation, such as rising prices, which then leads to higher wage expectations - yes, the so-call wage and price spiral.
There's already some evidence this is happening in New Zealand, with our labour market tighter than a tight thing and businesses facing immense cost pressures. The latter point was highlighted again in the ANZ Business Outlook survey preliminary reading for October released this week.
As well as showing that an incredibly high net 85% of businesses are expecting to raise prices, the survey also showed (perhaps not surprisingly) that 12-month inflation expectations were above 3%. Remember that the RBNZ is tasked with keeping inflation in a 1%-3% range, explicitly targeting 2%.
It's not a disaster if inflation rises above 3%, as it did with a big jump to 3.3% in the June quarter. But it comes back to the issue of how long inflation may stay high - and already as alluded earlier - the timeframes for when inflation may start to cool again are being pushed out.
Okay, so what are we expecting next Monday? An annual figure of around 4.4% to 4.5% is being touted by economists. That's higher than the RBNZ is picking. Housing, food prices, and transport-related costs are expected to be key drivers.
The inflation figure is also going to be the highest since 2011. But it is well worth remembering that the 2011 figures (which topped out at 5.3% in June of that year) were blown up by the last GST increase.
If we want to look at 'genuine' inflation - just naturally generated - then we need to go back to September 2008 for an inflation figure that's bigger than the one we are going to get.
So, a figure of 4.4%-4.5% for annual inflation to September seems about agreed on. But what comes next. Is this the peak? Well, probably not.
BNZ economists had been picking 4.3% inflation for the year to September, but tweaked that higher after high food price figures for September came out this week and also following that ANZ Business Outlook survey.
The BNZ economists now reckon on a 1.7% quarterly rise in prices for a 4.4% annual figure. They say the quarterly figure will like be the peak, in terms of quarterly rises - but see the annual figure rising further.
"The December quarter should see the peak in the annual reading with CPI inflation climbing to 4.7%," BNZ head of research Stephen Toplis says.
However: "In our opinion, the risk to these near-term forecasts is weighted to the upside. A 5.0% annual reading certainly can’t be ruled out."
Westpac senior economist Satish Ranchhod has a slightly lower inflation pick, going for a 4.2% annual rate.
He notes that New Zealand is "currently being buffeted by a perfect storm of inflation pressures".
"Much of this is a result of offshore factors. Disruptions to global manufacturing have resulted in shortages of many consumer goods and production inputs. That’s been reinforced by a lack of international shipping capacity, which has resulted in transport costs for many goods rising rapidly in recent months. And on top of those factors, we’ve also seen global oil prices effectively doubling over the past year."
But then there have been cost pressures specific to New Zealand.
"Most notably, the closure of our borders means that many businesses are struggling to source specialised labour. That’s seen wage costs pushing higher as businesses compete to attract staff. But the strength in inflation is not just due to rising costs. Prior to the Delta outbreak, domestic demand had been rising much faster than had been expected.
"In sectors like construction, firm demand has meant that businesses have greater scope to pass on cost increases into final prices, rather than taking a hit on margins.
"Furthermore, and of particular importance for the RBNZ, strong demand also means that inflation pressures are likely to persist even when the current supply-side pressures ease off. While the Delta-outbreak may moderate some of those demand side pressures in the short-term, we’re still looking at a strong medium-term inflation outlook."
ASB senior economist Mark Smith, who is picking 4.4% annual inflation, says the ASB economists have long been wary of two key upside risks.
"First, that the peak in CPI inflation proves to be higher than considered by the market consensus and the RBNZ. This looks to be happening, with much of the news on the inflation ledger to the upside (including global oil prices at 7-year highs). Our updated forecasts are now pointing to annual CPI inflation exceeding 4.5% by the end of this year," Smith says.
"The second major risk is that the uplift in inflation ends up having a more persistent impact on consumer prices over the medium term.
"It is still comparatively early days, but our gut feeling remains that high inflation will stick around for longer. Various cost shocks could easily filter through into widespread price increases. Labour shortages are looking increasingly chronic, with little relief from an open border for a while yet. What’s more, consumers (and firms) appear increasingly resigned to having to accept higher prices."
ANZ economist Finn Robinson and senior economist Miles Workman, who are picking a 1.8% quarterly rise, for a 4.5% annual inflation figure, have similar views.
"There are still a lot of one-off and ‘temporary but persistent’ factors pushing up prices, but more concerning for the RBNZ will be the strength evident in underlying inflation pressures," they say.
"A strong reading for core inflation next week may increase the RBNZ’s conviction (and market pricing) for near-term OCR hikes, but downside risks to growth and employment certainly aren’t going away, and delivering ongoing hikes may be no simple matter. As we head into the Christmas rush, pressure on already-stretched supply chains means we may not see inflation peak until the New Year – a bit later than we previously thought."
The ANZ economists say that these inflation figures "may sound pretty disheartening", especially considering they are currently only forecasting a 4.2% year-on-year increase in average hourly earnings over the September quarter (ie slightly negative real wage growth).
"But we’re confident that all going well, the RBNZ will be able to quickly rein in inflation pressure with a series of gradual OCR hikes over the next year. Household debt is high and rising interest rates will get traction, undoubtedly. The COVID-related price rises we’ve seen won’t last forever, and once supply chain congestion starts to ease, some prices may fall.
"Of course, the timing and magnitude of this normalisation is impossible to accurately forecast.
"When you add a central bank removing stimulus to COVID disruption easing, the medium-term outlook for inflation in New Zealand is more benign than the rather alarming headline numbers would suggest.
"If the RBNZ were to stand idly by, the risk of a wage-price spiral would be considerable, but that isn’t our forecast.
"The challenge for the RBNZ is that the longer the current Delta outbreak in New Zealand lasts, the more downside risk to growth and employment builds, while price pressures continue to rise."
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30 Comments
And if RBNZ raise rates, debt service costs for goods and service providers increase, meaning prices of goods and services will need to rise even further to cover that expense = even more measured inflation.
Falling rates and globalisation have been deflationary. Rising rates and movement toward national/internal reliance may be inflationary.
Will it surprise people if we see inflation rising in a correlated fashion with OCR increases? That’s when central bankers might start panicking.
I wouldn't be too surprised to see inflation rising despite OCR increases. It's all relative to other currencies and economies, isn't it? We are stunningly vulnerable to inflation b/c of recent high capital inflows from overseas. Those can reverse quickly. We're also entirely dependent on o/seas supply for fuel and a gazillion other inputs. And because of our wonderful mortgage bubble, we have less room to raise rates (without causing more problems) than almost anyone else. The only thing in our favour if a global inflationary environment persists is relatively low gov't debt -- and given that being bailed out of bad investments is a human right now, that account will get hammered and add to the currency pressure.
Good times.
Yes, in theory.
In practice, USD has an almost insuperable backstop, being the reserve currency; and there are all those Eurodollar debts out there that need repaying in dollars. We have no such backstop.
If there's any kind of liquidity crunch -- which we seem to be getting whispers of now -- USD are the best thing to hold, and it would be far beyond the power of the RBNZ to compete with that. In a risk-off environment the NZD gets hammered; it's a currency for the good times. And because we are now so poorly positioned to compensate for that with rate rises (given our horrible mortgage debts) we can only hope that optimism returns... ahhh, permanently I guess.
The assertion that because debt service costs increase with rising interest rates that this will then cause inflation, is suspect. Only those who are able to pass on increased costs will do so (monopolies) and would already have done so anyway, with lower interest rates, if they have such market power. Real interest rate increases increase the price of money, meaning more saving, less borrowing and spending and therefore drive less inflation.
Deflationary pressures (globalisation, technology) has led to central banks to lower real yields to avoid a deflationary spiral. A return of inflation, if central banks do the right thing, will be countered by higher real interest rates.
So companies with debt in an increasing interest rate environment just continue to operate with reduced net profit margins until what? They're all losing money?
Does that mean landlords are all running a monopoly? They tell everyone they will simply pass on rate rises to their customers, no problem..
Two things really its not only 4% a year and its not temporary. Anyone who takes any notice of prices when they go to pay the bills know its 10% and if your one of the unlucky ones who forgot to buy a house 12 months ago its 30% inflation. Wages are going to do what wages have always done, not keep up and worse still the price increases have not yet stopped.
Yeah, I think the absurdity of not including housing accurately in CPI is coming back to bite us. It's a great way of hiding a growing structural risk. It's also a driver of inflation -- tradies are still flat-out and will soak up any marginal increase in costs, because clients are now blase about borrowing an extra few hundred thousand dollars given that any Auckland property is a limitless ATM, for now. And, anecdotally, it's driving up wages -- at least where I work (software company) people are leaving jobs they like, in droves, purely for a pay increase, saying that they're only doing it because it's so hard to get a house unless you are single-minded about extracting as much pay as possible from your employer.
The impact of increased OCR on inflation is complex - only an idiot would claim that an increase in OCR impacts positively or negatively on inflation given the complexity of the interlinked variables that need to be considered in the moment and overtime.
One thing is very clear though - an increase in NZ OCR is not going to persuade OPEC countries to release their stockpiles of oil, or Taiwanese chip manufacturers to magic up some additional capacity, or Govt to freeze the pay of the public sector (or the minimum wage). Given that recent price increases are due to external factors outside of NZ control, and they will only take hold permanently if wages rise in response, I would assume that changes to the OCR are basically impotent (other than moving money from people in debt to bank shareholders and people in credit).
The other key point I would make is that 'inflation' is always re-distributional; if someone is paying more, then someone is getting more. Whether we care about inflation should therefore depend on whether we think the distributional impact is 'good' or 'bad'. For example, we would probably get some real life inflation if we raised minimum wage to $25 / hour and welfare levels to liveable amounts. If you are socially minded, you would probably be all good with this type of inflation.
The other key point I would make is that 'inflation' is always re-distributional; if someone is paying more, then someone is getting more.
More dollars, yes; but not more actual stuff. The experience of inflation isn't just relative, it can be absolute, if growth in 'claims on productivity' exceed actual productivity. Everyone can be paying more, and getting paid more, but receiving less in exchange for it than they expected. Is that not inflation? It seems to me that credit growth must eventually create inflation in this sense, if it isn't increasing actual productivity. Someone holds that credit asset, but the value of the money represented by the credit is lower for all parties if there isn't more stuff to buy with it.
Yes, agree on the dollars - although the transfer of dollars from one group to another tends to lead to the latter group consuming more real things!
The oversupply of (endogenous) credit money has clearly supported the inflation of the price of the speculative asset we call 'land' - but there is a big difference between an increase in the price of a thing or group of things, and a widespread sustained increase in all prices (inflation). My view is that the system settings that supported previous inflationary episodes (e.g. index-linked wages, strong unions, low level of globalisation etc) are no longer there and the uberisation of the workforce and the obscene level of rent extraction by capitalists mean that genuine inflation will never get going.
But, this paper puts it a lot better than me.
Yep -- but all this money that has been pushed into land prices, can it really be contained there? At some point, those landowners who have seen a big nominal capital gain will want to use that capital. If they refinance and use it buy a car and a boat and do some reno...
Our government is reintroducing strong union and cross industry wage setting, Fair Pay Agreements, starting late 2022. Globalism is facing insurmountable demographic and political hurdles in China. The conditions have changed and the lessons of the last 30 years are not highly relevant.
I for one am glad that the economy has been redefined as the credit expansion rate and the cost of servicing debt. Because out there in the 'real world' it's a story of logistical paralysis, not quite hyperinflation, labour shortages, unprecedented uncertainty, and future borrowing to pay for the illusion that now is good. Those conditions have rightly been put in the too hard basket, so thankfully we can continue our fetishizing over decimal points a little while longer.
I was going to write something like this but you've saved me the trouble.
From my seat (admittedly a small, unacademic one) there's a level of mania out there I've not seen before which seems at odds with the realities of the last 18 months. Demand for my trade is just through the roof, we are turning away $3 of business for every $1 carried out. If I want to hire a skilled worker, my expectation is to pay $10 an hour more than 2 years ago (so a good 25% more). Granted this is only a narrow view but it does seem indicative of a wider level of crazy, that I don't know can be measured using the old tools.
Something has to break. In the meantime though, weeee!
Are you actually a painter? Because that wouldn't surprise me. My wife works in building, there's no sign of a slowdown, and property owners are willing to spend hundreds of thousands of dollars on renovation with seemingly zero hesitation. They'll request a change on a whim, builder says 'OK, but it'll be another $50k to redo it", and they don't blink. But these are people who have made $1m+ in capital gains on their houses in Northcote or Meadowbank or whatever, so I guess it all seems like play money for now. I do think something is little broken in the brains around here -- the property bubble has really distorted people's perception of the value of money.
Explains what Michael Burry is say and why FED is lying about inflation :
https://www.youtube.com/watch?v=WGA4vzr7O1E
Previously reserve bank could get away but now with internet and social media hard to manipulate and lie though they still do as has been use to since ages.
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