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It will take a 'concerted effort' to squash wage-price spiral dynamics 'that are becoming ever more established' in New Zealand, ANZ economists say

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It will take a 'concerted effort' to squash wage-price spiral dynamics 'that are becoming ever more established' in New Zealand, ANZ economists say
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Source: 123rf.com. Copyright: dzmitryskazau

Stubbornly high inflation expectations are highlighting the challenge that remains for the Reserve Bank (RBNZ) in stamping out inflation, ANZ economists say.

In their NZ Weekly Data Wrap the ANZ economists reiterate that despite downside risks to economic growth continuing to build, they still see "upside risks" to their forecast for a peak Official Cash Rate of 5%. Currently it is on 3.5% with universal expectations of another sizeable hike (the ANZ economists expect 75 basis points) at the next review on November 23.

The economists said the upside risks were were reinforced last week by the RBNZ’s latest quarterly Survey of Expectations.

"It was all bad news, with inflation expectations rising across the curve, despite survey respondents also anticipating a much higher peak in the OCR. Essentially, inflation was seen as being much stronger and more persistent, even in the face of the rapid rate rises the RBNZ has delivered."

They noted that the sample size of the survey is a mere 33 “business leaders and professional forecasters”, so it’s not capturing the expectations of Kiwi businesses and households at large.

"But it does highlight that forecaster expectations are moving further towards the ‘RBNZ losing credibilty’ end of the spectrum, which would support super-sized 75bp OCR hikes in the next two meetings as the RBNZ defends its inflation target."

The economists say the latest Survey of Expectations "joins an array" of broader measures of inflation expectations that have remained "worryingly high" in recent months and that are "certainly not consistent with strong inflation dissipating any time soon".

"For example, in the October ANZ-Roy Morgan Consumer Confidence survey inflation expectations were little changed at 5.0% (5.1% previously). That’s down from peaks seen earlier in 2021, but remains well above pre-pandemic ranges of 3-4%. In our ANZ Business Outlook survey, inflation expectations bounced to 6.1% in October (6.0% previously), remaining close to their recent highs. Cost expectations and pricing intentions have eased modestly from extreme highs, but again are still far too strong to be consistent with low and stable inflation being achieved in the near term.

"Stubbornly high inflation expectations across a number of different surveys highlight the challenge that remains for the RBNZ. Yes, they have delivered significant monetary tightening in a very short period of time, and yes, that’s going to slow down the economy over 2023. But with expectations of high inflation becoming embedded into wage and price setting behaviour, it’ll take a concerted effort to tamp down wage-price spiral dynamics that are becoming ever more established in the New Zealand economy.

"As we note in our latest Quarterly Economic Outlook, recession risks are rising, but when price stability is at stake, getting inflation back down is priority number one."

Westpac senior economist Satish Ranchhod, in Westpac's latest Weekly Economic Commentary said the elevated level of inflation expectations "is a big worry for the RBNZ".

"Expectations, especially over longer horizons, are a key influence on how businesses adjust prices and wages. Their recent rise signals that the current inflation cycle could be even more protracted."

The Westpac economists are also predicting a 75 basis-point rise in the OCR on November 23 and with further rises to come next year.

"One of the major complications in the RBNZ’s fight against inflation is the prevalence of mortgage rate fixing. Around 90% of New Zealand mortgages are on fixed rates, and many of those are still locked in at the very low interest rates that were on offer in the early stages of the pandemic. That’s meant large numbers of households are yet to feel the impact of rate hikes to date, which has allowed them to maintain their spending patterns," Ranchhod said.

"That picture will change dramatically over the coming months, with more than half of all mortgages coming up for repricing over the next 12 months. In many cases borrowers will face refixing at rates that are 3 percentage points higher than those they are currently on. And as that occurs, we’re certain to see a slowing in domestic demand.

"But while we wait for the full impact of interest rate hikes to date to ripple through the economy, we’re still left with a picture of sizzling inflation pressures. And that leaves the RBNZ with a tough balancing act. Taking a more gradual approach and waiting to see the full impact of rate hikes could actually mean more pain in the longer term if inflation pressures do not ease off. In contrast, more aggressive rate hikes now could risk a sharper than necessary downturn in economic activity and employment.

"Ultimately, we expect the RBNZ will maintain its ‘stitch in time’ approach. That means the central bank is likely to continue to front load its policy tightening. And on balance we think that is the right approach, especially given the clear upside risks for inflation expectations. Indeed, if the RBNZ doesn’t get in front of those pressures soon, the New Zealand economy could realistically find itself mired in a wage-price spiral. That would impose serious harm on households and the economy more generally, with ongoing pressure on living costs and weakness in economic activity," Ranchhod said.

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28 Comments

Economists say 'stubbornly high' inflation expectations are highlighting the challenges faced by the RBNZ

Ask ecomoists who has put us all in this situation.... who is responsible for the current high inflation......is it still Russia Ukraine or Covi 19 OR ...............

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That is the Excuse and Front that is Needed.

From the Scroll.

"It is NOT about High Interest Rates to Fight Inflation. It IS about High Inflation to Justify High Interest Rates. Ponder on this before the Seal is Broken on the Second Scroll." 

 

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BANKERS and politicians.  

Money supply is supposed to increase in the good times, not to pave over challenges, or bribe the public.

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Just have to google what happens when a country prints money and the first result:

ref: http://knowledgeburrow.com/what-happens-when-too-much-money-is-printed/

"When money is printed, consumers are then able to demand more goods and thus prices rise and create inflation. So theoretically, when a country prints too much of its currency, inflation can occur and the currency may lose its value......."

I listen to our political leaders who say it was supply side inflation ...... but isn't this just the same as increasing demand, caused by increasing monetry supply??

Are we heading back to 1970s ?? .... good article in the Otago Daily times today 

Back to the future: should we expect an economic rerun of the 1970s? | Otago Daily Times Online News (odt.co.nz)

 

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A big couple of weeks, OCR announcement but first the HPI data............

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Indeed.

Inflation continuing to roar and hurt everyone and Labour is in a tight corner. OCR has to go up, and with the gap to the next review over the xmas break it should be at least 100 base points. That the Govt continues to let the ability to purchase food burn down for their core voting block (lower income), and continues to avoid punishing asset speculation and leveraged bank profit is simply....amazing to watch.

Perhaps to many rentals within the Labour community. How many does Helen have again....?

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The spruikers thought the National Party would save the property market next year if elected. 

However Jacinda and Orr have other plans. The final last lame sales Pitch has been completely destroyed. It does not matter who gets in now, it's all planned out. It never did matter because it's 2 wings to the same bird, but it did give some false hope to the sheep still believing we are not entering the biggest crash ever recorded.

5 More For Orr, That dropped TTP's Jaw, now he is in the fetal position on the Floor sucking on his Paw, the only Havelock Agent runs out the Door. Gutted to the Core, Tim drives to Gore full Boar as he runs from the Law.

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Knowing Mr Orr will go by 0.5% as lacks the will to curb when it comes to controlling - even this rise from 0.25% to 3.5% is as is being forced upon him.

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ANZ having a last push to get the OCR up, and more of their mortgage customers fixed on higher rates, before the deflationary pressures start to wash through into interest rates in 2023.

The idea that wages rising a bit because workers need more money to pay the bills is the start of a wage / price spiral is simply not credible in the 2020s. Wages as an input cost to domestic businesses (which is what actually matters) are running well behind price increases. Wages are being dragged up by prices, but they are nowhere near getting ahead of them, which is what any 'spiral' relies on.

The biggest pressure on wages at the moment is the price of oil, which feeds the price of almost everything in our economy, and RBNZ pushing mortgage costs to the moon to, errrm, tackle inflation.    

 

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From what I understand, weekly earnings have been ahead of inflation recently, but only because people are working more hours, or shifting from part time to full time work. Earnings per hour is not keeping up with inflation. Doesn't seem much of a spiral to me. 

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Actual weekly earnings (from payroll data) are up 6.4% on a year ago. But, most of this increase was in the last couple of months of 2021. Earnings since the start of 2022 are up 3.2%, and over the last 6 months earnings have gone up by less than 2%. The numbers move around a bit, but the trend is clear. We might see wages pick back up now as pay deals are pushed harder by people who can't afford the cost of living, but the idea that rising wages is pushing prices is clearly nonsense.

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The Monetary Policy Lever, being used to tame Inflation, has two aspects to it - (1) Price and (2) Volume.

How about we control demand driven Inflation (the capacity to pay) with Volume rather than Price?.

Stop jacking up % rates - or even slash them again if necessary to relieve the pressure on stressed households, but ONLY IF the issuance of Debt is curtailed.

Mr Orr can leave the OCR where it is, or cut it, if he has the courage to reign in the volume of bank lending, dramatically.

Oh! That's right. We're going to leave it until 2024 before we address that thorny, system-threatening issue, aren't we! So expect the OCR to keep rising.

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Those that havent borrowed much (the majority) will be ok.

Those that did.. this is the cyclical debt lesson. Just happens to be a very big lesson this time because the powers that be tried to fight nature and delay the downturn by pumping the boom.

It was entirely predictable to anyone that cared to do even basic research . Those taht did are cashed up and looking for new opportunities.

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It was predictable *at some point* but given this was at least seven years overdue post-GFC anyway, you could have been waiting a long time and you would have had to ignored a lot of signals from vested interests to the contrary. At some point you're just patting yourself on the back for stopped-clock logic. 

For some of us, putting our lives even further on hold to sit there and watch ourselves fall further and further behind is no longer an option. And eventually you start running up against biological constraints for certain things. 

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In some ways, I agree with you.

We decided to forego purchasing a house (turned down the finance offer) back in 2015 because we thought the prices were just ridiculous, and have rented since.

We've spent ~140k on rent since then. Considering the house price we were looking at the time was ~380k, you could argue that's a reasonable chunk of equity paid down, especially since the house would've have experienced capital gains over that time. Of course, we weren't buying for capital gains, so it didn't factor into our thinking.

However, we've found reason to appreciate the mobility that renting gives us, as we had employment issues within a year of turning down the finance offer. We've also had 3 kids in that time, and ran our own business. Renting hasn't stopped us living our lives - though our kids have noticed that we've moved a few times (slowly upgrading from sharing a rental with flatmates before the eldest was born, to the current 5-bed house which I doubt we could afford to buy even if we wanted to).

Now, I don't know if we're ahead or not finanically vs where we would have been if we'd bought back then. But we're happy renting, and are not currently losing large amounts of money in interest payments or lost equity, so the future feels brighter for us than for some.  But I'm not convinced it's because we were 'smart' or not - it was simply a choice.

A lot of people don't get the chance to make that choice, and I wonder sometimes if that's part of what fuels FOMO. I find the whole 'getting ahead' narrative a bit problematic also - what are you 'getting ahead' of? Other people? Why? I'd rather 'get on' with life, than 'get ahead' of others.

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Plenty of youngies I know are now stuck in their s## boxes.  They can't change towns for lifestyle or promotion or go overseas to work - unless they crystallise their negative equity and decide its ok to sell and live with a mortgage and pay rent!

 

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'Getting ahead' in the sense that at some stage, it's likely you'll have a divorce/illness/career setback/redundancy and be left treading water for some time. 'Getting ahead' is as much being able to weather the storm that is statistically likely coming your way at some point which is the issue I have with the whole 'everything will be fine, just accept you're trapped forever and smile' argument we see sometimes here.

As for choice: I grew up watching friends go through more than a house a year as landlords sold up from under them. It really was absurd. I just don't think I could deal with that on top of all the other crap that comes with trying to get by in Auckland, let alone put a family through it. 

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Agreed. A DTi implementation with declining multiplier rates over the next decade would allow that. Otherwise it OCR to the moon, and it should be policy to not have interest only other than for a short term bridging loan.

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This is an incredible story. Power companies not investing in new capacity so that they keep prices high... then using high prices to boost the value of their assets (and borrow money), which they then use to enable high dividend payments to their shareholders (payments that are higher than profits!) And, Govt as a major shareholder in three of the companies just sits there taking the money and turning a blind eye. It's a disgrace.  

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You ever tried getting a resource consent? People have gotten wise to the fact that attempting to do anything in this country is an exercise in futility. This won't get any better any time soon once we are blessed with co-governance.

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One would hope all official calls to seek productivity gains will be shelved going forward.

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The first thing that the power companies did when they bought the old Govt electricity generation & lines assets at the historic depreciated price was to revalue them on replacement cost - thereby creating tax "losses" that justified higher power prices for customers to recover their margim.

Never mind that the customers had funded the building up of these assets for decades. All done with Govt majority shareholder connivance, originally courtesy of Max Bradford.

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This is not going to end well for people that have not already re-fixed their mortgages for 3 to 5 years. If you have this major outgoing sorted and your wages are increasing with inflation then you will be ok unless of course unemployment ticks up but for now its looking ok.

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You don't think that it will all wrong in the next couple of years and they will be forced to cut interest rates again? I would think there is a high chance that will happen within the next three years, almost certainly within the next 5

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I agree with your statement. I think that the rules governing monetary policy may be changed if it becomes politically expedient to do so.

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It will take a 'concerted effort' to squash wage-price spiral dynamics 'that are becoming ever more established' in New Zealand, ANZ economists say

The Nobel Prize for Economic “Science” is really an ideological prize for right-wing “free market” economics of the University of Chicago-style neoliberalism. Its premise is that economies are self-stabilizing without any government regulation, which is called “interference.” This is an argument for privatization and financialization.

Giving an award to Bernanke is reflects the junk-economics assumption that inflation is caused by wage-earners making too much money. There is no acknowledgment of monopoly rent or other forms of economic rent as “unearned income,” that is, price without inherent cost-value. Bernanke’s principle is that of central banks that are controlled by the commercial banking center: The solution to every problem is to lower labor’s wages and living standards. There is no concept of a correlation between rising wages and rising labor productivity.

This is not scientific economics. It is political class war. Link

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Stubbornly high inflation expectations are highlighting the challenge that remains for the Reserve Bank (RBNZ)

All credit to Mr Orr, who is the driver here with his funding-for-lending programme (FLP) issuing monies to NZ banks at 0.25%.

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