An online Reserve Bank (RBNZ) survey of about a thousand Kiwi householders has found they expect inflation to be actually higher in a year than it is now.
The RBNZ's latest quarterly Household Expectations Survey found on average that inflation's expected to be 7.4% in a year's time. This compares with an actual peak of 7.3% last year and a most recent figure of 6.7% for annual inflation as at the March quarter.
And the bad news for the RBNZ is that those surveyed DID know about the fall in inflation from 7.2% to 6.7% as of March before taking part in the survey - or at least should have, since the survey was conducted after the release of the March quarter CPI inflation figures in late April.
Food prices of course have continued to rocket, with annual food price inflation hitting 12.5% in April, its highest level since 1987. That figure came out after this survey had been conducted, but food price inflation had already gone over 12% in March.
So, back on the survey results, the one-year CPI inflation expectation figure has increased from 7.0% as in the previous survey three months ago. But 7.4% isn't the highest expectation there has been in this survey, that was 7.5% as of December 2022.
The expected two-year inflation rate is lower, as you might hope, but it has risen a lot from the previous survey. The survey respondents now expect 4.5% in two years, up from 2.5% in the previous survey.
Also, the latest survey shows that respondents now expect a bigger wage rise over the next 12 months than they did three months ago. The expectation is for a 6.0% wage rise over the next year, up from an expectation of 5.8% in the previous survey.
This survey won't be great news for the RBNZ and goes against the recent encouraging (for the RBNZ) results from its survey of business leaders and forecasters.
Key among its aims with its current tightening of monetary policy and interest rate hikes is to kill 'inflationary expectations'. That's because if people expect prices to be higher in the future, then they will want higher prices for things they sell now and they will want higher wages. This fuels actual inflation.
If there is a silver lining, it is that the survey participants saw inflation of just 1.1% in five years' time, which of course is well within the RBNZ's targeted 1% to 3% range.
The survey participants are also asked about house prices and they remain reasonably gloomy in the short term, but see better things ahead in five years' time.
Households think house prices will be 0.6% higher in a year (although that is up on a pick of just 0.1% in the last survey three months ago). However, the survey participants see house price inflation in five years' time as 6.2%, up from just 4.4% three months ago.
The survey also questions participants about the possibility they might miss either mortgage or rent payments in the next three months. These figures have not so far shown any sign of increasing.
On average, households report a 15.5% chance of missing a rent payment and a 15.8% chance of missing a mortgage payment in the next 3 months.
42 Comments
I have the perfect solution on how to solve inflation. All the current government need to do, is resolve to increase inflation. Seeing as they fail spectacularly at everything they touch and generally achieve the complete opposite of whatever they set out to do, all they need to do is come up with clever plans to increase inflation. Problem solved!
This has been pretty reliable with the exception of the WW2 period (1940s - very early 1950s) where CPI went from extremely high inflation to deflation while rates were at 0%.
It is possible that since 2010 (GFC) we have had the OCR set far too low - generally we have the funds rate above the inflation rate. Having the funds rate so low has caused asset bubbles and excess credit creation = bad. And may result in persistently high inflation/OCR in the years ahead to correct this imbalance.
https://static.seekingalpha.com/uploads/2015/9/1/saupload_Capture_5.png
Nice graph. But 'merican. Their CPI is quite different to ours. As is their banking system and loan laws (especially around residential mortgages).
What is, however, quite interesting are three periods.
1. 1960-1970 ... The funds rate was above the inflation rate but inflation continued to climb. Why?
2. 1980 to 1990 ... The funds rate was way above the inflation rate. Why?
3. 2010 to 2020 ... The funds rate was way below the inflation rate but inflation didn't climb. Why?
The only period where a correlation exists is between 1980 and 2000.
The graph may actually show the failure of using central bank policy to control inflation. Just sayin'.
Or put another way ... I don't think that graph shows what you think it does. ;-)
Taylor Rule requires the OCR to be 1 to 2% above the prevailing CPI. I believe we are well on track for this:
The Taylor Rule: An Economic Model for Monetary Policy (investopedia.com)
Which begs the question - why not just hand the Taylor Rule to a computer and follow it exactly? ;-)
https://en.wikipedia.org/wiki/Taylor_rule (see the Limitations section)
A case in point where the rule fails abysmally - as we have just seen with Pootin's invasion of Ukraine - is when predictive tools can be used to see a massive problem and react accordingly. For example, in the lead up to the invasion, oil markets were getting concerned and future contracts were going up. They knew, as most global observers knew, a massive build-up of assault brigades around Ukraine was probably going to end badly, especially as it was known how Putin felt about Russia's rights to Ukraine. Interesting, many in oil markets believed the west would simply roll-over as they did in 2014.
So no. While Taylor Rule shows good correlation in 'normal' (i.e. slow moving) times it fails as often as not in other times. One of the problems with such 'rules' is that correlation is not causation.
Another issue is that the Taylor Rule actively ignores other are policy levers that can be pulled by central governments. And one should add, when central governments do pull these levers the Taylor Rule can be wildly wrong.
Also, NZGecko, see my response to Independent-Observer above. Also - a case of correlation is not causation.
"Households think house prices will be 0.6% higher in a year (although that is up on a pick of just 0.1% in the last survey three months ago). However, the survey participants see house price inflation in five years' time as 6.2%, up from just 4.4% three months ago"
Lol - were households forecasting -15% deflation in house prices this time last year?
Out of interest I decided to look back through RBNZ's historic data for this survey.
In March 2022:
Net % expecting higher house prices in 1 year = 60%
Expected house prices inflation in 1 year = 5% (median) 5.7% (mean)
More people than not thought house prices would be higher and by 5-6%. A good example of how the herd isn't always right.
LOL ...
https://en.wikipedia.org/wiki/Wisdom_of_the_crowd
I suspect the survey sample know about as much economic theory you'd get from most pub conversations on the subject. Who were they?
The survey is conducted online and is made up of a nationally representative sample of New Zealand residents aged 18 and over.
Let that sink in for second. (LOL, lol, lol.)
Well as a member of the public, I had to decide what size retainer I should ask from a potential client for prospective work. In the past I would have asked for $1.0 - 1.2k for the work. I decided to go for $1,500 instead just with the way things have gone and seem likely to go. I expect RBNZ is aware that the public's perceptions and expectations do have a very real effect on how inflation actually will play out.
You'll note you "asked". The decision whether to grant the additional amount wasn't made by you but by the client.
If the sample set were 1000 decision makers it would carry more weight.
Further, you have no idea what factors the decision maker weighed up. In my experience, I am often surprised, nay flabbergasted, at the quotes I receive for future work or standby / on-call work - people massively undersell themselves by looking backwards rather than looking forwards. Keep in mind that past inflation is not necessarily going to be the cause of future inflation.
Wife has been decluttering lately and sold more than $4000+ worth of stuff on trademe and Facebook since around February. Mostly kids old toys and clothes..etc. Thanks to inflation, most went for more than what we originally paid for!
Toy from Kmart we purchased 5 years ago for $39.95 sold for $60….
Lol there is 0% chance CPI is 7.4% in a year.
Globally the war on inflation has already damaged the rising inflation beyond it recovering. In USA it peaked just under 9% March 2022 today it is under 5%.
RBNZ's brainwashing strategy that inflation would not be tamed whilst they pushed up interest rates twice as much and twice as fast as they had indicated they would (in 2021) has worked a treat, say it loud enough and often enough and it will be believed. They made out like inflation was worse than an atomic bomb threat against the economy when it was really just throwing a few sticks and stones at the economy temporarily. They in fact provided inflation with its most powerful weapon, exceptionally low interest rates. Inflation was always going to be temporary off the back of the one-off pandemic.
They will have you believe the war is no where near finished yet. It is already won.
The issue with the public's inflation expectations is not whether they are right or wrong next year, it is that their expectations for the future influence their behaviour now. Generally, higher inflation expectations encourage higher consumption spending - better to buy that new dishwasher now, it'll be 10% more expensive next year.
Nguturoa is right, however we (The West) no longer have the resilience or fortitude to do what is required to bring inflation down. Inflation comes down when we start to have excess capacity in the economy, it's going to require broad economic hardship and we are nowhere near that yet. Instead, we are watching a systemic debasing of our currencies. Buy a car today, you'll probably sell it for a profit ina few years. Try and buy a rolex right now and it's almost an interview process.
NZ's wealthiest 1% are now ranked 4th in amount required to enter, think about that for a moment.
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