When to fret about the inflation figure
Most banks expect Stats NZ will report inflation at a 32-year high of 7.1%, but take note if it falls outside of the following band. Tom PullarStrecker reports.
Annual inflation is expected to peak at the rate announced by Stats NZ today. A figure outside the 7% to 7.2% range would be a surprise that could move interest rates. The reversal of fuel tax cuts should add about 0.6 percentage points to inflation later this year.
There will be an unusually high level of interest in inflation figures for the June quarter that will be released by Stats NZ today, Kiwibank chief economist Jarrod Kerr says.
ANZ, ASB and Kiwibank are all tipping Stats NZ will report annual inflation at a 32-year high of 7.1%, while BNZ and Westpac are expecting it to be a fraction below that, at 7%.
While most forecasts are in the same ballpark, Kerr said the number was very hard to predict and was not ruling out a surprise.
Forecasting was ‘‘more of an art than a science’’, he said.
‘‘We do have a lot of the pricing data, but we are missing the majority of it. So we are ‘guestimating’ quite a lot.’’
Kerr said a figure outside of the band of 7% to 7.2% had the potential to move the market and feed through into retail interest rates.
‘‘If it comes in it at 7.3% or above, I think that would be quite a shock to the upside and you’d see wholesale markets factoring in even more interest rate rises.
‘‘If it comes in at 6.9% or a little bit lower, that would be a pleasant surprise where we’d see wholesale rates fall.’’
Markets wouldn’t be caught too off guard or concerned if annual inflation came in at 7% to 7.2%, he said.
‘‘But that still means we’d be running the highest inflation in decades.’’
Infometrics is forecasting quarterly inflation will come in at 7.3%, partly because of evidence of a sustained lift in building costs.
But principal economist Brad Olsen believed its forecast was the highest among economists and agreed the market could move if inflation did indeed come in at that level, or higher.
‘‘7.3% would probably be a bit unnerving for the market,’’ Olsen said.
‘‘Anything more than 7.1%, I think they’re probably going to look at and say ‘that’s not under control by any means’.’’
Equally, if inflation did come in under 7%, that might prompt more speculation that the official cash rate (OCR) would not peak as high as 4% next year, as the Reserve Bank’s projections currently imply, he said.
Although the Reserve Bank reset the OCR at 2.5% on Wednesday, there is a comparatively short wait of less than 41⁄ weeks before it issues its
2 next monetary policy statement on August 17.
Like other banks, Kiwibank is currently forecasting the Reserve Bank will opt for another 50 basis point rate hike at that meeting, taking the OCR to 3%.
But Kerr is one of a number of economists voicing some caution.
‘‘I personally think we’re getting to a point now where the Reserve Bank has got quite a lot of traction with the rate rises they’ve done so far,’’ he said.
‘‘I’m quite concerned at the fall in confidence that we’ve seen in households and businesses – that worries me.
‘‘So I think there could be a situation where the Reserve Bank softens its tone.’’
Kerr expected there would be more interest than usual in the quarterly inflation number, which will be released at 10.45am.
‘‘There’s talk of this ‘cost of living crisis’ that we’re living through at the moment. People are acutely aware of the price pressures that are out there, so I think it’ll get a lot of attention,’’ he said.
‘‘And, of course, it feeds straight through into expectations of what the Reserve Bank is going to do.’’
Most economists believe the June-quarter number will mark the high tide of inflation, before it gradually starts dropping back towards the Reserve Bank’s target band of 1% to 3%.
But Olsen said Infometrics was becoming increasingly concerned that the tail might prove more stubborn, beyond its peak.
‘‘We’ve elongated how long we think higher inflation will stick around.
‘‘That greater level of persistence in inflation does raise the risk that maybe the Reserve Bank does have to push the OCR to that higher level to really slam things back.’’
Based on previous calculations from ANZ, the reversal of the Government’s temporary tax break on petrol and diesel sales – currently scheduled for August 14 – would appear likely to add about 0.3 of a percentage point to the annual inflation rate in the September quarter and a further 0.3 of a percentage point in the final quarter of the year.