Marlborough Express - Weekend Express
Don’t pop the champagne corks yet
TALKING POLITICS
OPINION: So far, so good has never been a sound basis for long-term planning. Regardless, some market analysts have begun living in hope that the economy’s bounce back in recent months might mean the worst of the recession is over.
Perhaps this country has experienced one of those precious ‘‘ V-shaped’’ recessions, where activity plunges sharply, but recovers just as fast. Maybe New Zealand has dodged a bullet, just as we largely did with the global financial crisis.
Maybe, but hold the champagne.
Perhaps instead – and this seems more likely – we are seeing merely a brief spike in price inflation as demand surges, as some of our supply chain problems get ironed out, and as firms finally feel able to pass on some of the costs they had felt forced to endure while the pandemic was still cutting a swathe through consumer demand and business confidence.
Regardless, some analysts have been excitedly suggesting that the Reserve Bank might even start raising interest rates as early as May, 2022.
To other observers, that sort of speculation looks premature.
As Infometrics senior economist Brad Olsen dryly told this column, the pattern of recent price rises will not be sending the Reserve Bank ‘‘screaming’’ to raise interest rates anytime soon, and probably not for years to come.
As Olsen says, annual inflation is still running at only 1.4 per cent, well shy of the Bank’s desired 2 per cent midpoint.
Moreover, a significant slice of the recent quarter-to-quarter inflation rise has been caused by hikes in airline fares and domestic travel accommodation costs, hardly the staples of household spending.
With hindsight, the 20 per cent average increase in domestic accommodation costs reported during the December quarter looks stunning.
Despite the absence of international tourists , the average prices in this aspect of domestic travel have been going up for Kiwis, not down.
Conceivably, this could be because some low and midprice tourist lodgings have been driven out of business by the pandemic, and the surviving top end players – hotels and Airbnb have pushed up the average prices.
Logically though, for price inflation to be sustainable, wages must also eventually rise.
Yet recently, any wage increases have been almost entirely in the minimum wage, and in public sector pay. Meanwhile, private sector firms are still facing Covid-related costs and supply chain uncertainties. ‘‘The private sector.’’ Olsen says, ‘‘is not seeing much [wages] action. But until you get firms that are investing, that are paying more in wages, that are seeing activity at a sustainable clip [then] the Reserve Bank has already indicated a path where it will maintain its current settings until those trend conditions materially shift.’’
So the public shouldn’t worry that headlines about rising inflation herald an imminent rise in mortgage rates. Not until 2023, at the earliest.
In the meantime, inflation might well reach (or exceed) the virtuous 2 per cent midrange point, for a time.
Even then, Olsen believes, the Bank would be loath to risk pulling the interest rate trigger too soon, thereby disrupting business planning and pushing inflation back below 2 per cent.
To the Reserve Bank at least, inflation is a fragile flower that needs to be nourished, not crushed.