Soaring food prices in the past month have encouraged BNZ economists to tweak their inflation forecasts higher - raising their annual inflation pick as of the end of March 2022 to 6.6% from 6.4% previously.
Statistics New Zealand said on Monday that food prices shot up 2.7% in January - the biggest monthly increase in five years.
BNZ senior economist Craig Ebert said in the latest BNZ Markets Outlook publication that while food prices typically increase in January on seasonal grounds - the 2.7% was far more than seasonal, "and more than the 1.8% we had pencilled in".
December quarter figures released last month showed that annual inflation had hit a three-decade high of 5.9% at the end of 2021.
"...Inflation is pervasive, is the message, Ebert said.
"And it’s likely to persist at uncomfortably high rates, judging by last week’s RBNZ survey of expectations. This showed respondents’ two-year ahead view on annual CPI inflation up at 3.27%, from 2.96% last quarter. This was the loftiest result since the RBNZ began specifying a CPI inflation target, back in the early 1990s. The one-year outlook spiked to 4.4%, while the five-year view nudged up to 2.30%, from 2.17%." [Also, the 10-year ahead inflation expectations pushed up to 2.12% from 1.97%.]
Kiwibank economists in their weekly First View publication said what stood out in the latest RBNZ survey was "the magnitude of the rise at longer [time] horizons".
"Respondents don’t expect CPI inflation to return to the RBNZ’s 2% target mid-point over the survey’s entire 10-year horizon," the economists said.
They said longer forecast horizons are seen as a measure of the respondents’ confidence in the RBNZ’s ability to deliver on its inflation targeting mandate.
"It’s all about credibility."
They said the latest results survey of survey of expectations adds further support to their view that the RBNZ will lift the Official Cash Rate (currently on 0.75%) rate at each review this year to take the OCR to 2.50% by November.
"While current market pricing suggests that market participants are toying with the possibility of a 50 [basis point] hike at the upcoming February MPS, we think the RB will stick with a more measured 25bp hike. At present, risks to the economy are not all one-way. Daily omicron numbers are rising fast and are yet to peak, and geopolitical tensions surrounding Ukraine have added volatility to markets."
The RBNZ has its next review of the OCR on Wednesday, February 23.
Westpac economists in their Weekly Economic Commentary said it is clear there will be a lot for the RBNZ to digest since its last review three months ago.
"On the one hand, December quarter inflation printed even higher than the RBNZ expected, and anecdotes also point to it becoming more persistent," they said.
"That on its own would suggest a need for further monetary policy action. However, early signs that higher interest rates are having a cooling effect on the housing market will be welcome (the sales figures for January will be released on Tuesday). And as the RBNZ noted in November, it’s not clear how households’ spending appetites will adapt to living with Covid in the community – not least because the Omicron wave will be in full force at the time the RBNZ makes its deliberations.
"There’s no question that the OCR has higher to go, with the debate now around the extent and pace of rate hikes. Our view remains for a 3% peak in the OCR by the second half of 2023, which can be reached in a series of 25 basis point steps. However, financial markets continue to price in a high chance of a 50 basis point move at this month’s review, and wholesale interest rates have risen further.
"We suspect the local market is being dragged along by overseas trends, as speculation grows about interest rate hikes in the US and Australia in the near future. But these central banks are more at risk than the RBNZ of falling behind the curve on inflation – the RBA has only just ended its bond buying programme, the Fed is just starting to slow down its purchases, and neither have started lifting their policy interest rates yet," the Westpac economists said.
56 Comments
RBNZ has screwed it big time under the baseless excuses of pandemic and employment.
Why do we have such people holding positions of power to decide if I can feed healthy food to my kids or not.
They are solely responsible for this increase in prices. They are paid in multiple of six figure salaries so they don't care about cost of food. We poor do.
The entire blame is being pinned on "global phenomena" (tradeables) for runaway inflation. Never mind all the mindless monetary stimulation, border restrictions for seasonal workers and weak response to market failures driving the prices of basic items through the charts.
One would think those in charge of running the show would be throwing everything at this cost of living crisis but Orr is busy fighting climate change and team Cindy is distracted by the protestors on their front porch.
RBNZ didn't flinch at dropping the cash rate 75bps preempting an emergency, why would RBNZ hesitate to take similar measures now to control the runaway inflation emergency that is already unfolding? The market is correct, we will needs at least 50bps to make sure we can get back within the inflation target band and defend the Kiwi. No room for half measures this time.
Yup. This where the rubber meets the road. If RBNZ doesn't start raising hard and fast to chase down inflation. The NZD can expect to become another basket case currency which will be considered worthless as a store of value. Dogecoin will be held in higher regard.
"Respondents don’t expect CPI inflation to return to the RBNZ’s 2% target mid-point over the survey’s entire 10-year horizon,"
That should be incredibly alarming message for the RBNZ. It’s amazing they have let things get this out of hand. They have had clear data for months that the economy was overheating and they have sat on their hands
The RBNZ should be very relaxed. Yes they probably over-stimulated the economy, and they will unwind some of this, but they did no more than any other central bank. Inflation is going to be high for years and our standard of living is going to gradually erode for the next 20 years. You cannot switch an economy from carbon to net zero without serious inflationary consequences - from food through to travel and construction. The RBNZ should shift it's target to 3 to 5% in recognition of this and stand pat.
Are supply chains going to be perma-disrupted?
Yes, there are a lot of wider issues at play
- The microchip supply issues were around before covid
- as were the lithium supply issues with EV Batteries.
- Oil is still not $100 a barrel (Although close), which we know it can hit, sustain, and likely exceed.
- Many cancelled supply routes to NZ were marginal pre-covid, so are unlikely to be reinstated.
- There is significant political tension around China (Taiwan/Hong Kong) and now Russia (Ukraine), not to mention many members of the EU are still basket cases economically.
- ETS and climate change are seeing tranport and production costs increase siginificantly.supply.
- Interest rates will increase (which increases all debt - which all businesses have gleefully taken on as much as they could)
- Our currency (Faith in Govt) is dropping.
Aging populations across the OECD mean that there are fewer workers per consumer which drives up the relative value of labour.
Technology does not seem to be improving workforce efficiency at any appreciable rate. Throughout the early silicon age we probably picked most of the low hanging fruit and need a similar advancement before we will see per capita productivity improve again.
RBNZ is run by few people, as an institute it's incredible but a current lot in power making it a joke. By cherry-picking what is in their mandate and what is not.
When comes to house price it is not in the mandate, but when it comes to inflation it's in their mandated but they cannot control it.
So what are you there for just to take big packages and rob kiwis and fudge data?
Supermarkets are absolutely creaming it, due to the laughably weak government action after their "enquiry" into their businesses. How do I know they are creaming it?
The prices at my local farmers market almost hasn't changed in the past 2 years for staple veggies and fruit. 2 years ago I was spending $75 at the farmers market, now I spend ~$80. However when we need to go to the supermarket, that same spend has gone from ~$130 to ~$200. It's quite ridiculous too, we were in PakNSave on the weekend, a bag of tiny spinach = $5. Farmers market for double the amount of spinach = $3. Bok choi at supermarket = $4 for 2. Farmers market = $1.50 for 4.
I have been tracking it quite closely since the start of COVID, knowing the supermarkets would start gouging. I haven't been wrong.
Good observation Blobbles, why don't you start amalgamating farmer markets throughout the country, put them under one legal umbrella and grow them into a powerful nationwide chain? You're likely to win 3 fold:
- provide cheaper food to Kiwis
- lower supermarket prices because of your competition
- get remunerated handsomely for your efforts
Maybe Nongreedykiwi can participate in that venture with you?
That's not a terrible idea... sure there are some overheads running a retail business, but there is a space here I think. I remember working in foodstuffs and hearing about the amazing salaries being paid to produce managers at some major supermarkets. It was upwards of $130k and that was 10 years ago.
If you could get the farmers to pack their produce directly onto say bread shelving, then simply use the same shelving in your store, it would massively reduce the need for labour and make transportation/display super easy. I am always amazed at the supermarket all the people employed to take veggies etc from boxes and display them very nicely in all these curved and chilled display cabinets. When most customers would probably be fine with them just dropping the box on a stand and taking off the lid.
Mate a business idea is not what we need to bring prices lower. They were not high a couple of years ago.
We need better decesion makers right from the top and boot the greedy out.
We are a very small nation and a very small number of greedy can tilt the balance right away.
There is a great story about how things working in big organizations which I have copied below. Small organizations don't have resources so they suffer optimization due to their small scale while big organizations have multiple layers and they suffer inefficiencies due to additional overhead. There needs to be a right balance in the size of an organization to achieve high optimization and efficiency everything else is a drag.
Every day, a small ant arrived at work early and starting work immediately, she produced a lot and she was happy. The boss, a lion, was surprised to see that the ant was working without supervision. He thought if the ant can produce so much without supervision, wouldn’t she produce more if she had a supervisor!
So the lion recruited a cockroach who had extensive experience as a supervisor and who was famous for writing excellent reports. The cockroach’s first decision was to set up a clocking in attendance system. He also needed a secretary to help him write and type his reports. He recruited a spider who managed the archives and monitored all phone calls.
The lion was delighted with the cockroach’s report and asked him to produce graphs to describe production rates and analyze trends so that he could use them for presentations at board meetings. So the cockroach had to buy a new computer and a laser printer and recruit a fly to manage the IT department. The ant, who had been once so productive and relaxed, hated this new plethora of paperwork and meetings which used up most of her time.
The lion came to the conclusion that it was high time to nominate a person in charge of the department where the ant worked. The position was given to the cicada whose first decision was to buy a carpet and an ergonomic chair for his office. The new person in charge, the cicada, also needed a computer and a personal assistant, whom he had brought from his previous department to help him prepare a work and budget control strategic optimization plan.
The department where the ant works is now a sad place, where nobody laughs anymore and everybody has become upset. It was at that time the cicada convinced the boss, the lion, to start a climatic study of the office environment. Having reviewed the charges of running the ant’s department, the lion found out that the production was much less than before so he recruited the owl, a prestigious and renowned consultant to carry out an audit and suggest solutions. The owl spent 3 months in the department and came out with an enormous report, in several volumes, that concluded that “The department is overstaffed.”
Guess who the lion fired first?
The ant of course “Because she showed lack of motivation and had a negative attitude.
Speaking of weak government action, gentailers in our energy markets are also clocking their most profitable earnings period every - the most recent being Contact Energy's annual profit up 72% off higher revenue and lower operating costs (generation costs).
The taxpayer-funded Winter Energy Payments plus the economic damage from high energy prices driving down our industrial output significantly outweighs the dividends that the Crown receives from these oligopolies.
To be fair, the cost of retailing out of a massive facility that costs thousands a square metre to build is higher than some dude getting paid cash out the back of a 1996 HiAce.
Because of various factors, everything is just costing more to do. Presumably it's transatory, but what it's telling us loud and clear that things are cheaper if the world is collectively more calm, and way more scarce when it's not.
"Respondents don’t expect CPI inflation to return to the RBNZ’s 2% target mid-point over the survey’s entire 10-year horizon," the economists said.
The Reserve Bank’s mandate is to keep interest rates between 1% & 3%.
If these respondents are correct, which is highly likely, the the RBNZ has failed badly.
Worst case is some banks could fail because external influences could push up interest rates much higher than expected. This, on top of planned & unplanned excessive spending by the government & supply shortages could cause the housing market to have a very hard landing.
The RBNZ is supposed to manage risks & clearly there is now a much bigger risk to the stability of the banking system.
Now is probably a good time to sell your house, sit on the sidelines & re-enter the market when cpi inflation starts to decrease.
The recent announcement that minimum wage increase by 6% is interesting after tax it’s 4.9% so still below inflation! Is the so called living wage going to be increased ? Who initially pays these increases? Employers , which then is added to costs and then to consumers . Main contribution to inflation council rates and petrol. Cap rates at inflation and control petrol prices. The RBNZ increasing OCR during a pandemic won’t curb inflation just cause utter mayhem and higher unemployment and recession. NZ is reliant on tourism and hospitality which is now a domestic market and this is where higher interest rates will curb expenditure. Government credit controls and inflation are counter productive in the world as it is! Start managing the country and stop controlling people as governments were setup to do!!!!
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