Extinguishers at the ready.
The inflation fire looks like it may have died down a little from the scorching 32-year high 7.3% annual rate as of the June quarter, but that doesn't mean anyone should be suggesting the trouble is over.
We may have seen the peak of this inflationary cycle - maybe - but there's much more to this story yet.
The expectation is that Consumers Price Index (CPI inflation) figures for the September quarter to be released by Statistics New Zealand on Tuesday, October 18, will show a reduction from that stratospheric 7.3% annual rate.
The Reserve Bank (RBNZ), which is straining every sinew to dampen the fires by overseeing a whole series of jumbo sized interest rate hikes, is picking an annual rate of 6.4% and a quarterly rate of 1.4%.
I didn't yet have all the previews from the major bank economists in front of me at time of writing this, but the RBNZ's pick seems somewhat lower than other economists are thinking. Westpac economists, for example have a 1.8% pick for the quarter and 6.9% for the annual rate, while ANZ has 1.6% for the quarter and 6.6% for the year.
My sense is that economists have been possibly pushing their picks up a little in recent days, which is probably not encouraging. The surprisingly high food price figures released on Thursday (October 13), showing food price inflation staying at a 13-year high of 8.3% in September, would have certainly helped that.
Notwithstanding all this though, it still seems the inflation figure to be released in the coming week will see some sort of reduction.
The main reason we will see the annual inflation rate fall from the 7.3% peak is just quite simply because the September 2021 quarter figures fall out of the reckoning - and they were huge. Enormous. A 2.2% rise in the quarter.
So, a 1.4% or 1.5%, or 1.6% result for the September 2022 quarter, giving us an annual rate of 6.4% or 6.5%, or 6.6% is going to seem perhaps okay. But perhaps not really.
The key thing to watch out for will be the composition of the inflation, by which I mean literally where the inflation is generated.
The inflation machine has in the first instance been fired up by 'tradeable' inflation that's imported from overseas - think things like oil prices.
But increasingly in recent times domestically generated 'non-tradeable' inflation has started sending out a whole wave of heat too.
Wage rises (with average hourly earnings up 7% in the year to June) have warmed to the task, with the super tight employment market (unemployment rate only 3.3%) enabling employees to push for rises to match the rising cost of living.
The RBNZ as mentioned has embarked on a heavy duty cycle of interest rate hikes. It has jacked up the Official Cash Rate (OCR) from just 0.25% at the start of October 2021 to 3.50% currently. The five consecutive 50-basis-point OCR hikes are unprecedented.
Another 50 point rise is expected at the November 23 OCR review.
I'm increasingly of a mind to think that the RBNZ might pull out the even bigger guns and go for a 75-pointer.
The inflation figures out on Tuesday, plus labour market figures (unemployment and wages) on November 2 will have a big influence on the RBNZ decision.
To get back to that non-tradeable/tradeable inflation split, it's worth tracking where we are.
Here's what Stats NZ had to say on the subject when releasing the last CPI figures for the June quarter on July 18:
The tradeable inflation rate, which measures goods and services that are influenced by foreign markets, was 8.7% in the year to the June 2022 quarter – the largest annual movement, either up or down, since the series began in June 2000.
Petrol; diesel; and milk, cheese, and eggs were the biggest contributors to the movement.
Domestic, or non-tradable inflation, was 6.3% in the year to the June 2022 quarter, the highest since the series began in June 2000.
Higher prices for construction, rentals for housing, and ready-to-eat food were partly offset by road passenger transport and rail passenger transport.
Non-tradable inflation measures goods and services that do not face foreign competition. It shows how domestic demand and supply conditions affect consumer prices.
The point to note is that the RBNZ can't do a whole lot about the 'tradeable' inflation. Realistically, it really just needs to wait for the impact of things like oil price spikes to abate.
The expectation is that tradeable inflation is now set to fall quite swiftly - although it has to be said that with the global situation so volatile there are any number of things that could upset this expectation.
But taking this giant caveat in our stride, we can see that the RBNZ is expecting the annual rate of tradeable inflation to drop to 6.5% in the September quarter from that previous 8.7% figure, and then to drop further in the December quarter to 4.9%.
However, the RBNZ's picking the 'non-tradeable' inflation - the stuff we're generating ourselves here - to have an annual rate of 6.3% as of the September quarter.
Now that's exactly the same - IE no reduction - as was recorded for the June quarter. For the December quarter the RBNZ's picking that non-tradeable inflation will have dropped - but only a little - to 6.2%. And by March the RBNZ sees the figure falling again only slowly to 6.0%.
So, in other words, the RBNZ reckons that domestic inflation is going to be 'sticky' as economists like to say. It's going to hang around.
This is all very significant, because it is the domestically generated inflation that the RBNZ can really do something about - by squeezing those interest rates. It has some measure of control over domestic inflation. It has the means - albeit blunt instrument (OCR) ones - to bring domestic inflation to heel.
Which is all a very long way around of saying that it is the non-tradeable figure that will really need looking at in Tuesday's CPI release. If this figure was to rise - even if the tradeable figure drops a lot - then alarm bells will go off at the RBNZ.
It's fair to say that amid the strong rises in overall inflation that we have witnessed in the past year, the very strong rise of domestically generated inflation has been a big and most unwelcome surprise.
As mentioned earlier, this has now manifested in some pretty meaningful wage rises, with average hourly rates up an annual 7% as of the June quarter.
The RBNZ's not expecting the wage rises to ease off any time soon. It is forecasting that for the September quarter (figures to be released on November 2) the annual hourly wage rise figure will be 8.3%. And this is expected to ease only slowly - still forecast to be 7% by December 2023.
Of course if there's any upside shock in the coming non-tradeable inflation figures then this will put further pressure on wages, particularly if the jobs market stays tight.
All in all the jury is still very much out on whether the RBNZ has 'got this' and whether the inflation genie that has been unleashed in New Zealand can be persuaded back into the bottle. If it can't then the RBNZ may have to apply some brute force - through a higher OCR than it wants to apply.
So, all eyes on what the inflation figures will bring on Tuesday. It's important.
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111 Comments
Diesel is food. Pure and simple. Production, cartage, warehousing, distribution, retail, not to mention shoppers' travel to pick up the goodies.
And every cc of the magic fluid is imported, at the mercy of international pricing, freight/insurance/financing costs, exchange rates and ticket clips from intermediaries.
Nowt the Orracle can do about any of this.
Or cargo bicycles.
Deflationary pressure? What’s the saying, the best cure for high prices is high prices?
I got a quote for some work to be done at our place, it was way higher than I expected, I told the guy so and said I would leave it for now - I genuinely can’t justify the cost.
The guy came back two days later offering to do it for 20% less.
Popped into a dealer a few days ago for a popular Japanese small car, 1200cc, hybrid or ICE. Nothing in NZ until about January next year. Given a price but didn't even bother to ask if it would be forex adjusted. Definitely do not buy cars that are not ex-stock NZ.
Yeah they, are as a friend of mine is in market to buy and was advised the same "buy now before interest increase."
Atended an auction yesterday, was onsite and agent was marketing between 1.1 million to 1.2 million but it went for 1.3 million ( Though RV was 1.45 million but agent mentioned that is over valued) . Not that their were too many bidders but only two bidders- FHB and the asian young couple who bought were mentioning that it is their third auction, having missed out on earlier two, so agent knew that they will go all out and they did.
In Auction even if get two genuine interested bidder are able to achieve decent price
After auction went to another two other open home and both had good number ( not like last year but still good number).
First open home : did not got sold in auction and had drop price after two weeks of auction being failed. Just after attending the open home friend got a message from agent that presenting an offer and may be multiple offer.
Initially when going for auction were inviting buyers over 1.35 million than was by negotiation and finally after two weeks had asking near 1.20 million ( Must have got offer between 1.15 to 1.2 million- assuming)
Second Open home was a good cross leased three bedroom two bathroom in East Auckland, has auction next Saturday and encouraging buyer between 1 million to 1.1 million but seems to be favourite with elderly down sizing and think may go more than 1.1 million.
Seems some movement in housing market but if it does not turn into positivity overtime (though have doubts as nothing has changed, in fact getting worse, even interest rates are to go up) , next fall could be disastrous or can say that NZ is immune to crash in housing market even if world fall apart.
Wait and Watch
House across the road from us sold at auction a couple of months ago. I thought they must have taken a big haircut but homes.co.nz now showing the price and it’s pretty good considering the condition of the property. While I’d like house prices to continue falling, I’m not sure it will be as much as it should be without unemployment etc, people will just not sell. Keep seeing comments here about being able to make low ball offers, I think they are wasting their time, houses are still selling at ok prices.
This statement is looking more correct by the day.
The property Ponzi is going to be the sacrificial lamb to be given up in exchange for some control of this runaway inflation.
This will also cause the overdue rebalancing of the NZ economy away from parasitic housing "investors" into productive activities of the real economy. Yes, there is going to be some short-term collateral damage, but unfortunately this is unavoidable and much better than any other alternative. It is time to pay the piper, and time to acknowledge that the fool's paradise created by the incompetent and shortsighted muppet at the helm of the RBNZ (Orr) was simply not sustainable. More sustainable housing prices (around half of the current over-inflated values, in real terms) will also have great social and economic benefits, freeing capital for the real economy. Bring it on.
Will the Government be forced to abandon the planned removal of 25c fuel excise subsidy? If they do remove it, that's yet another reason for inflation to be "sticky" going forward. If the FED continues to raise rates or doesn't lower them, the RBNZ cannot lower them. Our currency would tank - more inflation.
Unless it all crashes (chances are increasing by the day it will), high interest rates than the short sighted debt junkies ever considered, are here to stay.
Agreed. To remove this subsidy now would be political suicide. The current Government and possibly the next is on the hook for this costly subsidy now. Apart from crashing oil prices, a disinflationary environment in general, its hard to imagine a scenario whereas it could be removed, albeit slowly or otherwise.
... many of the current government's policies are " political suicide " ... 3 Waters ... Fart Tax ... centralization of polytechs ...
Not sure if adding the 25 cents petrol tax back on will make their situation much worse than it currently is ...
... worst government ever : facing annihilation...
https://www.nbr.co.nz/on-the-record/arderns-star-has-fallen/
If I had to bet my house on it, I would pick Jacinda Ardern to announce that she is stepping down before Christmas. She won’t lead the Labour Party into the next election. She can’t. The announcement must surely be coming.
Its not a coincidence that she's spent the last few months jaunting around the world meeting with organisations who might see fit to employ her. By the looks of things, Grant Robertson is doing the same thing. Name one thing that Jacinda Ardern achieved in all those overseas trips other than a ton of self promotion? I mean, she went to Washington, met with the President of the USA during an infant formula emergency, and still couldnt get a deal for Fonterra and A2 Milk. How useless can a PM be?
Bollocks ! ... the EU offered up some scraps , less than 1 % of their beef trade ... and Ardern bit at it like a hungry & grateful piranha ...
... she'd have achieved more for our cause as free traders if she threw it back in their faces & screamed at them " Get real ! " ...
Yeah, that wasnt an achievement, it was a sell out while cosying up to the Europeans. The FTA had been in the works for years, and had been rejected previously due to its one sided-ness (massively in favour of the EU, very little for NZ) but selling out NZ is something Jacinda is quite comfortable with. Just look at the proposed food tax.
It seems that many Property Bulls are resting their leveraged finances on a National win. A return to the good ol days. For starters they have it on "good authority" that the current interest rate environment has little to do with house sales being in the doldrums. Just another TA Muppet made this gem of a comment.
"It's likely that interest rates have less impact on the housing market than many people here believe"
Praying and trusting that once again working Kiwis will be made to bear all the tax load while investors get to freeload, and that generous price and rental yield subsidies are maintained at the same time. Perhaps also that 7-houses Luxon will push back on Nicola Willis and Chris Bishop, and support NIMBY opposition to liberalising zoning.
Surely, surely they shall get to freeload and obstruct once more! If they wanted to pay taxes they'd work for wages like the plebs!
It will be interesting to see whether the low unemployment rate can be increased much by higher interest rates. It feels like the biggest problem is at the bottom end of pay scale, and a lot of those people do essential jobs or jobs for big companies that will just pay whatever they have to. Its hard to see the demand for employees in supermarkets, rest homes, McDonald’s, petrol stations, etc go down much because of interest rates. And the likes of hospitality and tourism are so under staffed I doubt they will be cutting jobs any time soon.
Good post, I generally agree.
I think in the urban development area that I work in there will be some discrete spikes in unemployment within 6-9 months. Think architects , residential sector- focussed engineers, planners. And of course builders and tradies.
But even in those jobs there’s been labour shortages which will mitigate job losses in the downturn. There will be some job losses but perhaps not that many. There will be less job openings and wage growth pressures may ease.
I am far less bearish on employment than I was previously. And the lack of big increases in unemployment will mean interest rates go higher than they might have done.
It’s amazing how many sectors are struggling for staff! I get the fruit pickers, the nurses/doctors and truck drivers - they were struggling pre Covid… but do we really rely that much on imported labour!
somewhat it’s admirable to reform sectors to be more resilient through investment in technology and/or labour… the downside is business at the margins go broke while those better placed change.
With high wage growth, and the experience employees have had in certain sectors, many have left from burnout or as there are jobs with similar transferable skills needed where they can get 20% more pay so they jump ship. Now we are stuck with those on traditionally lower paid jobs, less skilled, who are getting higher wages due to the staffing shortages and tight labour market, pushing further inflationary pressure onto consumers. I know many teachers who found office based roles since COVID who can work from home, live more rurally in a more affordable house, and they would never go back to teaching after how they were treated with mandates, and the extra work pressures put on them as colleagues burned out and left.
Isn't it just lag effects? Employment follows the credit cycle on a lag. It is the worst indicator to use as it is so far behind, so basing policy on it means you are 1 to 2 years behind the curve. Hence the tendency of the central bank groupthink to make everything worse by amplifying the distortions on the way up and then running everyone over again on the way down. As Von Mises put it, referring to this, it does no good to reverse back over someone who has been run over.
Change starts slowly and then accelerates. It is very scary when unemployment hits the acceleration part of the curve.
Some of those sectors suffer chronic wage shortages vs living and housing costs, so it makes sense they'd had few applicants.
It's a pretty abhorrent situation if we end up subsidising those industries by importing cheaper workers only for taxpayers then to end up funding Working for Families for them a couple of years down the track.
The Reserve Bank (RBNZ), which is straining every sinew to dampen the fires by overseeing a whole series of jumbo sized interest rate hikes, is picking an annual rate of 6.4% and a quarterly rate of 1.4%.
Yeah, nah. They aren't "straining every sinew".
The OCR rate rises have been lagging mortgage rate rises. They have been lagging swap rate rises by the largest margin EVER.
RBNZ are dragging their feet. Delaying. And all the while inflation... that silent thief... is making us ALL poorer. Those consumer prices are not going to come down again. Non tradeable inflation is becoming entrenched and RBNZ is raising OCR slower than Canada, slower than the USA.
Too little, too late.
What time period are you thinking of there Jimbo?
It has been so long since there were meaningful rate rises... but the OCR was perfectly in line with the 1 year swap all through the Bollard hiking years. It always has been .... until now.
We could have a philosophical debate about whether swap rates bake in the projected OCR rate, or whether OCR follows swaps. But the undeniable fact is that the two have always tracked each other closely... until now. Bollard hikes were similar to the ones we are experiencing now.
CPI continues to surprise to the upside overseas, no reason why it shouldn’t here.
Pundits will continue to insist the pivot is just around the corner and that we’ll be back to the glory days of 2021… as inflation continues to rip, the NZD continues to tank, and CBs continue to raise rates.
Inflation cannot stop in NZ until house prices are back to 2019 levels. It cannot stop globally until equities are back to 2019 levels. That would constitute sufficient capital destruction for the real productive economy to catch up. The recent drastic falls in Tesla make me think we are finally in the way there at least.
Realistically, it really just needs to wait for the impact of things like oil price spikes to abate.
Oil will weaken in USD terms (well, as long as OPEC don't keep cutting production) but as the Kiwi keeps plummeting we are unlikely to see much benefit.
I hope inflation is lower but we'll need to see back to back quarters of declining inflation to even say we are on the right path.
Are these the same economists who are totally unaware that the banks create the money that they lend out and not reserves and deposits or the money from QE and are they the same economists who think that taxation and borrowing finance the governments spending.
Then it's time that they all found themselves a new occupation and something useful to do with their lives.
The whole World, including NZ of course, is in for a regime of higher interest rates than most of us can imagine.
From the UK this morning, and yes, they do have additional current problems, but the underlying ones are the same as the rest of us.
(BoE Governor , Andrew Bailey) But I will repeat what we have said already. We will not hesitate to raise interest rates to meet the inflation target. And, as things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.
The entire speech is worth a read.
https://www.bankofengland.co.uk/speech/2022/october/andrew-bailey-openi…
Now they all want to exit at once. They are thus frantically trying to raise liquidity. The word “cascade” is quite accurate. Each step leads to another one, bigger than the last.
https://images.mauldineconomics.com/uploads/pdf/TFTF_Oct_15_2022.pdf
Inflation has been artificially suppressed in the June and Sept quarters as most landlords are now locked into a Oct-Feb rent review period as a result of the Labour Govt imposed rent freeze from March to Sept 2020 and the new law that landlords can only put up the rent every 12 months. That means for most landlords (unless they have turned over a tenancy since then) have not had the ability to pass on the higher interest costs to tenants yet.
You can see the big spikes in NZ average weekly rents in Oct/Nov 2020 and again in Oct-Jan 2021. And that was before inflation and interest rates going up! https://www.interest.co.nz/charts/real-estate/rents-average-north-island
1000's of new dwellings coming on stream every month while population growth remains stagnant. Highly indebted landlords need to practice restraint. Lest there tenants choose to relocate to a property that is carrying less debt and the owner can afford to meet the market. A couple of weeks of vacancy could be the equivalent of half a years worth rental increase.
If you are the landlord of a decent 3 bedroom house with a double garage and a backyard located in the inner-middle city suburbs you can pretty much charge what you like - they ain't making any more of them! If you are the landlord of a poxy 2 bedroom dog box crammed onto a section with half a dozen others, no parking, and no garden, well you'll be in a race to the bottom as to who gets all the emergency housing tenants. Currently there are more houses than townhouses, so unless you want to give up your lovely big house and move into a 60 sqm kennel, you'll probably be forced to pony up the extra rent.
Agree. And what has gone wrong with our society, where we think of a decent 3 bedroom rental as a "luxury" that some vampire squid specuvestor can hoard and charge exorbitant money for?
I find this whole idea of yearly rent increases repulsive. We already have the highest rent-to-income ratios in the developed world. And a cost of living crisis. But there is always some vampire squid out there that wants more... more... more...
A point of view from the UK this morning.
The trouble is that our economy, loaded with debt, is far too decrepit to cope with free-market solutions. You can say you are going to ‘stimulate it back to health’, but you might as well try to turn a hobbling pensioner into an Olympic athlete by giving them a handful of amphetamines, an electric shock and a can of Red Bull. There are no gimmicks left.
Interesting that the poms are calling truss the iceberg prime minister as she will only last as long as a head of lettuce. More interesting that a head of lettuce only costs $1.19NZD in the UK. How come we pay 3x as much?
Because your lovely Labour Party is shit canning our economy
The Black Swan over Inflation Land I'm worried about is a collapse of the US Bond Market, and the Fed printing mega to save it (as per UK). The Bond market is like 4 times bigger than stocks. Imagine how much inflation that would unleash?
The irony is that bonds are in trouble because of rising rates to try and control inflation, and saving it by Fed Brrrrrrr will increase inflation and the pressure to raise rates further. I expect years of thrashing about trying to save everyone and everything.
https://twitter.com/ThHappyHawaiian/status/1580794359720849408/photo/1
The fed appears to be on a mission to destroy the economy and make sure even the ashes are blown away The decline in the investment grade bond market is already significantly worse than the GFC and multiples worse than previous pivots
"The fourth worst year on record for global government bonds. We're making history in all the wrong ways during 2022" - and this is looking at over 300 years of bond market returns. This period could be one for the history books and future study for finance/econ students.
https://twitter.com/Mayhem4Markets/status/1581255733781282817?s=20&t=mz…
To the bond holders: https://youtu.be/c73MCLs1i7w looking for love in all the wrong places
Commiserations
Immigration opening up again - where will they live? If coming with most currencies you get a lot of NZ dollars today.
Incomes rising - can afford more interest payments and banks report payment schedules ahead?
Have my parents Auckland house to sell. Already been offered over RV from last year.
I see more rate hikes than many expect coming.
Prices aren't going back to where they were. There's too much debt baked into the system and returns have to be worth having. The upwards pressure might go away, but supermarket food isn't going to drop to pre-Covid prices. Ever.
In short: It's always going to cost at least this much to feed, clothe and transport you and your family from now on. Oil dropped to $40 a barrel not long ago, remember.
So any payrise you get now, that meets 'current' inflation is just squaring you up for the period that figure relates to. If you want to actually get ahead, you have to end up with more than that. And if you get caught by a tax bracket change, you need to earn even more.
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