By Roger J Kerr
CPI inflation numbers due out tomorrow, Tuesday 17 July, should be very close to the 0.50% consensus forecasts and not move short term interest rate markets.
The moneymarkets will also ignore the fact that annual inflation will drop to 1.1%, the lowest level since 1999.
Anyone taking the historical inflation figures as an indicator of future trends would be making the same mistake the RBNZ have made a few times in the past of driving down the road by only looking in the rear-vision mirror to keep the vehicle on course.
The interest rate curve out to three years forward is determined by the market’s expectation of whether the RBNZ forecasts of growth and inflation are going to be close to actual outcomes.
My view at this time continues to be that the RBNZ are far too complacent on the future inflation risks.
The risks are all to the upside.
The low annual inflation rate today is due to the one-off price increases in early 2011 dropping out of the annual figures. Most forecasts are for a 0.8% to 1.0% increase in inflation in the September quarter.
Another quarter as high as that and you are suddenly looking at an annual CPI number of above 3%, not 1%.
There is no question that the NZD/USD exchange rate trading mostly above 0.8000 has kept inflation at lower levels over the past 12 months as imported consumer items continue to fall in price. In many ways these lower prices for furniture, clothing and electronic equipment have disguised other more general price increases and led to some of the complacency.
Over the last six months the Kiwi dollar has experienced a couple of sharp sell-offs to 0.7500, thus the previous continuous price decreases in imported consumer products is coming to an end.
Over the next six to 12 months stable imported goods prices are more likely, rather than falling prices.
The interest rate markets and the RBNZ will not be forgetting the fact that nearly all our inflation comes from the supply-side of the economy.
The future price increase pressures are starting to build with rents, house building costs, electricity, rates, insurance premium and food prices all on the rise. Petrol prices have been reducing over the past two months; however there is no guarantee that will continue to be the case. There are still many sectors of the NZ economy lacking true competition, thus many cost increases are passed straight through to consumer selling prices.
The demand-side inflation pressures in the retail space may have been absent up until now, however we all know retail demand goes up with house prices in New Zealand and a lack of supply of new houses in Auckland and Christchurch is clearly now pushing up residential property prices.
The markets and the RBNZ would be potentially underestimating future GDP growth, and thus inflation, if they take a tunnel-vision view that Europe’s debt problems are going to drag the global economy back into recession and thus hurt the NZ economy.
The greater probability from the global perspective is positive economic growth (not recession) as China eases monetary policy further and the US economy performs better than it has done in recent months.
If agriculture, construction, manufacturing, mining/energy and retail sectors are all expanding in New Zealand it is hard to see growth and inflation being subdued.
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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
1 Comments
In my view the Reserve Bank is following the wrong target in looking for 1-3% inflation at the expense of everything else. Even if Roger was correct in expecting higher inflation going forwards (and I suspect he's wrong without a change in RB targets), the RB would tighten by increasing interest rates. That would lift the supply of foreign money chasing higher yields, in turn driving up the exchange rate. Higher exchange rate; higher imports, lower exports, higher current account deficit.
So inflation would be okay, but the economy would continue to be shafted, if you bought into a definition of a healthy economy being a sustainable one where the population in that economy had not only reasonable income and lifestyle, but also increased their collective real wealth over time.
A fix would involve steps to lower the exchange rate, either by controls, or by making the foreign carry trade less attractive through lower interest rates, or direct competition through QE. That lower exchange rate would involve some inflation in imported goods and services, while local goods and services largely stayed the same- in total aggregate terms inflation of say 5% for say 3 years.
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