A curious thing happened to me in the supermarket the other day.
I was halfway through the joyless task of unloading my basket of items on to the cashier's conveyer belt, when I realised an animated discussion was taking place between the cashier and the young couple (possibly early 20s or even younger) ahead of me.
It took me a moment to twig what was up. Then I did. Sheer bafflement from the young couple that the same goods they had recently bought were seemingly suddenly so much more expensive. It must be wrong.
It wasn't. It was inflation.
Nobody under the age of 30, or even 40 is naturally going to 'expect' prices to rise. Because it's something they have not experienced. Not really. Inflation hasn't existed in NZ for years in a meaningful way. They have no 'expectations' of inflation. What's happening now is a huge wake-up call.
For grumpy old me this is all just a reminder of my first fulltime job in the late 1970s, which as it happens was in a supermarket. Then the inflation rate was oscillating between 15% and 17%, which meant that prices were going up every week. Literally. In these pre-barcode days one of my main tasks (I kid you not) was taking a bottle of methylated spirits and a cloth and rubbing off the felt-pen-marked prices on goods and replacing them with a new marked price. And no, the new price wasn't lower.
Prices were expected to go up. So they went up.
For me, one of the great triumphs in New Zealand and, indeed, much of the world, was, subsequent to the late 1980s, the removal from people's minds of the expectation that prices will go up.
It's one thing for central banks to physically pour cold water over inflation with weapons of choice such as interest rate rises, but unless they can get into people's heads and stop the mindset of 'prices will go up', well, then inflation becomes self-fulfilling. People seek higher wages, the employers put up prices to pay for that and then they add some more on top in the expectation that the next round of goods they order will cost them more. Vicious cycle. Inflationary cycle. All fed by those damn inflation expectations.
In the past the Reserve Bank has put a lot of weight on its own survey of business people and economists, which assesses expectations of the future level of inflation. I know that at times the RBNZ has actually directly been prompted to move the Official Cash Rate in reaction to unexpected moves in these expectations.
But I wasn't sure if under the newer regime of Governor Adrian Orr and the Monetary Policy Committee whether that still held true.
The last survey results came out on February, just two weeks before an OCR review. And the survey showed a significant 'unmooring' of expectations. Even the expectation for our rate of inflation in 10 years' time had showed an untoward movement, rising to above the 2% midpoint of the RBNZ's 1%-3% target range.
So, I wondered if the RBNZ, come the release of the latest Monetary Policy Statement on February 23 would be at all unnerved by these sharp moves in expectation.
Oh yeah.
You bet.
Considerable reference was made in the MPS to inflation expectations.
Take this from the report of the Monetary Policy Committee meeting:
When considering the case for a 50 basis point increase, the Committee noted the high starting point for inflation and the drift upwards in measures of inflation expectations. The Committee agreed that maintaining stable longer-term inflation expectations near the midpoint of their target would greatly assist their purpose.
And this from the main part of the MPS:
Elevated near-term inflation expectations are expected to contribute to higher inflationary pressures in the short term.
And then most crucially:
The increases in longer-term [inflation] expectations in New Zealand since the November [MPS] Statement remain within the range of changes in recent decades. However, there is a risk that persistently high inflation will lead to a change in wage- and price-setting behaviour and influence how prices are set. More persistent inflationary pressures would, all else equal, require tighter monetary policy to ensure the MPC meets its economic objectives.
So, here we go. Battle is joined. And RBNZ Deputy Governor Christian Hawkesby again referenced inflation expectations in an interview this week with interest.co.nz's Jenée Tibshraeny.
In its latest MPS the RBNZ forecast annual inflation, which hit 5.9% in the December 2021 quarter, to peak at 6.6% in the March quarter of 2022. But that predated the start of Putin's War with Ukraine, and Hawkesby's already conceding that - largely due to spiking oil prices - inflation will be higher than that 6.6% figure in March.
In ANZ economists' Weekly Data Wrap released at the end of last week the economists said: "We could see CPI inflation break the 7% mark, as it has in the US, and is expected to do in the UK."
And also on the ANZ, its latest - fairly dire (in terms of results) - Business Outlook Survey produced results that ANZ chief economist Sharon Zollner said were suggesting CPI inflation "could hit 8%, rather than the mid-6s the RBNZ and we are currently forecasting".
Since inflation first started to re-emerge in a big way last year central banks around the world have tried to maintain the impression that it will go away - although the term 'transitory' was put to bed earlier this year. And indeed the RBNZ's latest forecasts in the MPS don't see the CPI coming down to within the top of the target range of 3% till the middle of next year, while it's not forecast to hit the 2% target midpoint till early 2025.
Whether even these forecasts are realistic though has to be seen in the light of what's happening right now. Oil prices are unlikely to drop any time soon. Regardless of whether there is a relatively swift resolution of the hideous Ukraine war, I think ongoing supply chain ructions can be expected. And the sanctions against the new-pariah, Russia, will have blow-back on the rest of the world. Then there's Omicron...
Please, nobody say: 'What else can go wrong?'
While much of this stuff might still, at a pinch, be seen as 'temporary' a lot of these disruptions have now been temporary for quite a while. Which is the point where young couples shopping at the supermarket start to get accustomed to seeing their bills going up, and they want higher wages, and their employer wants higher prices to pay for those wages and also for anticipated higher prices for the next order of goods (assuming the disrupted supply chain even allows delivery).
Having therefore once 'won' the war on inflation expectations, I'm afraid the world's central banks and our little old RBNZ are going to have to do it all again.
It wasn't easy last time and I don't expect it will be this time.
75 Comments
What we don't realise is that a lot of countries use Russian oil, coal, gas and rare minerals/metals for relatively low prices, including New Zealand.
We've enjoyed decades of economic prosperity, relatively low inflation and high technological advancement in large part because of Russian resources.
This was changing because of the pandemic and now accelerated by this Russian invasion of Ukraine and the ensuing sanctions against said invader.
I'm in my 50s, and I can remember in the '80s when petrol hit 99c/litre and couldn't go up more because pumps didn't go over 99.9 cents/litre.
If you're in your '30s you would have been born between about '83 and '92. I can't see how you can recall petrol costing you 87c/litre for your car if you are the age you claim unless you got a car while you were a child.
Im sure these 30-40 year olds understand that housing is not a good which is consumed and will therefore cheerfully look through its skyrocketing cost these past few years and see that inflation is actually fairly low, just like the pointy headed economists at our esteemed RBNZ.
I think it is relative.
Our inflation has been relatively moderate, those of us who grew up in the 70's and 80's were used to much higher inflation and inteerst rates.
Independent Reserve Banks with inflation control mandates reduced the impetus, until their mandate changed and they overinflated the money supply more than needed. I'm still deciding whether it was Orr being incompetent, or following the directions of an incompetent government.......
Food and shelter costs more, wages inevitably rise and businesses have to raise prices. Its called a spiral, I believe.
One of the causes is the price of oil. When it rises, fuel costs goes up and transport, heating, manufacturing etc goes up too.
RBNZ cannot solve this as it is beyond their control.
This morning, at the supermarket, meat costs more, even chicken.
On my way home, a thought- Russians woke up to a 30% devaluation of their money. I wonder how much more more they pay for meat.
Oh yes. The wage and price spiral that was last rampant in the 70s. We ended up with interest rates around 18-19% to bring it under control, and Muldoon dreaming up a wage and price freeze to try and stop it. Abdicating inflationary controls thru flacid OCR changes just to protect debt bloated asset prices is treason.
Time to exit the clowns!
Ordered a 1/4 beast 6 weeks ago. Apparently the meat works were backed up for 7 weeks, so we still haven't received it. They will likely honour their price from 6 weeks ago. Glad I'm not in Russia because they sure as heckfire wouldn't honour a 6 week old price under current conditions.
I checked the important stuff as soon as I saw their currency go down.
they pay about 1 dollar per litre of gas per-crash and about 4 dollars a pint for a beer in a pub. NZ dollars.
So they were paying loads less than us for these two items at least before and still loads less now their currency has lost 30%.
Didn’t check their average salary though. That could be the kicker.
"Meet the new empire, same as the old.
Wait, no, no! We are nice and benevolent, nothing like the old."
American presidents said much the same as Xi says about being benevolent and not imperial.
Would one of the reasons to hold off a 50 point hike be because of how many mortgages are up for renewal over the next year?
Giving people time to lock in lower rates with smaller hikes would save some pain for households for the length of their next mortgage.
With bigger hikes, more income is locked into mortgage payments over the coming years, reducing discretionary spending, driving down inflation perhaps too much and risking an overcorrection.
I'm curious if this theory makes sense - what do you think?
Already pointed that out after the figure of 60% of mortgages were falling due this year. If you have not already got the memo that rates are rising you have been living under a rock and deserve to get hit. Yes I think its just another reason the RBNZ are holding off as long as possible as it will kick the can down the road another 3 to 5 years. The problem will be the FED announcement in March, there are now forces in play outside what little old NZ can control.
Working in the Asian animal feed industry we have been hit with raw material prices increases in the last 6 weeks of 20-30%. This will flow directly into the price of chicken, pork, eggs, farmed fish, dairy...the list goes on. Give it another 6 months and food prices will be climbing rapidly.
If our government genuinely is concerned for the poor in NZ (of which there are many, and growing since Labour came to power) then they should subsidize fresh food and support our local communities. The idea of paying 'export prices' for locally produced food is destructive to our society.
Inflation surveys probably aren't that representative of future inflation, guessing isn't typically a good method of forecasting.
The inflation rate itself is indicating the expectation of future scarcity or abundance. People tell us every day what their expectations are by the prices they are willing to pay today for consumables and assets.
the size of your mortgage does not go up with inflation -- only the size of your payments
TAKE A 500k Mortgage against 100k income -- - no matter that wage rise was 5% and inflation 10 --
after 5 years wage is $127,600 and the mortgage would be around $467000
the size of the mortgage to wages ratio would change from 1:5 to around 1:368 a very significant difference
your mortgage is now considerably less than 4 times your income as opposed to 5 -
Its affordability, your other costs and repayments may all have been higher - but equally your asset and equity may also have gone higher -- they are all variables -- but your big mortgage sure has reduced in real terms against your income.
Thanks kpnuts (genuinely), I understand the theory. The question was based on the current state of affairs where wage inflation isn’t keeping up with cost of living increases, coupled with potentially decreasing property values and increased mortgage rates.
I don’t think the current time is the “best” time to have a “big old fat mortgage” if the ability to service that mortgage is getting squeezed at all ends. No point looking back in 5 years with a higher salary but a mortgagee sale on your resume.
“your mortgage is now considerably less than 4 times your income as opposed to 5”.
In that time the housing unaffordablility limit may have dropped from 5x income to 3.5x.
That’s what people don’t get at present - central banks don’t appear to want wage inflation, yet we have CPI at 6%. Everyone is getting poorer - and getting poorer while you have a mountain of debt is very bad, not good.
If wage inflation equals CPI…fantastic. In the interim, this isn’t a good situation for big debt holders.
it's potentially a double edged sword, right? High inflation equals rising interest rates, which potentially equals housing crash.
And there's every likelihood real house prices will decline.
The CPI has been low for years, and house prices booming. The reverse is happening right now.
HM, I was clearly talking about a mortgage, you talk about house values, it's not the same.
Yes house prices may drop but you are still better off (or less bad off) if you have a big fat mortgage on that house that gets eroded by high inflation.
The worst scenario is to own a house outright with a large deposit in the bank because both will devalue badly
If your house price falls by 50% in real terms while you’re paying it off, that isn’t a good outcome…just a terrible investment.
If we have 5-10% inflation for the next 5-10 years with flat nominal prices, this is what home buyers are facing. Your hard earned $$ is going to the banks, while your personal buying power is being destroyed in real terms (the real house price)
My recollection is it took around 15 years to get inflation under control in NZ last time.,,,and the worst of it occured post Muldoon.
Another feature that is likely to echo was the exodus of the young offshore (mainly Oz)
I suspect those property prices may decline somewhat more than anticipated.
I have had no pay rise for 5 years and inflation has eroded my weekly wage. Nonetheless I consider myself lucky because I have 2 freehold houses and money in the bank. On paper 2 houses have apppreciated over $5000000. So personally am not worried about inflation.
It is very easy to pick out the posts of those who have not actually experianced inflation. Even those who rem as a child bit here and there, have no concept.
These are the times where old school , centuries old , old school principles come into play. The 1st and most basic, "own at least 1/3 of the market value of what you possess" 1st rule of personal financial security.
Do that or be close to it, espec if own a house, the inflationary effect on that increases your % of ownership. The other thing is collectable stuff like classic cars, boats all tend to loose their value as ppl have to cash up later.
And if own a house, if go in to inflation owning more than 1/3 of market value of what you possess, weekly cash flow maybe tight, but there is opportunity to pick up cheap assets that will turn into a nice nest egg in the long term.
Also preductions of 6%.. rubbish...basic economics, the elastic effect, long period of lowest inflation in generations/ 100yrs, it will bounce way up. Then throw in the ave interest rate pre 2008 for previous 40yrs was around 8%. Seem a lot of economists, commentators are either to young to remember, or attitude of "we are more clever than history" and will once again repeat it as have generations for the last few 1000yrs.
Having therefore once 'won' the war on inflation expectations, I'm afraid the world's central banks and our little old RBNZ are going to have to do it all again.
It's this kind of superficial commentary on blanket expectations and price rises, and the unchallenged insanity of tasking the central bank with jacking interest rates to decide how many people should be unemployed - when there is no threat of the wage-price spiral that underpinned the '70s inflation - that does my head in. What the late '80s and '90s really did, David, is enshrine capital and monetarism and decimate unions and labour, ensuring there is no chance of such a spiral (never mind a level playing field) in the foreseeable future.
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