Don’t count on a rate rise any time soon

Martin Hawes re­flects on why in­fla­tion re­mains stub­bornly low.

Sunday Star-Times - - BUSINESS / VIEWPOINT -

Is in­fla­tion dead? The an­swer is no, and it is prob­a­bly not even in pal­lia­tive care. How­ever, it is poorly enough to be in the in­ten­sive care unit and to have its few loved ones gath­ered around with con­cerned looks on their faces.

In­fla­tion’s po­ten­tial demise is an im­por­tant ques­tion. Ul­ti­mately, the amount of in­fla­tion dic­tates what you will pay for a mort­gage and what in­vest­ment re­turns you will get on your sav­ings.

The per­for­mance of your busi­ness, or whether you are likely to see your wages in­crease, will de­pend very much on what hap­pens to in­fla­tion. In­fla­tion is im­por­tant.

Like the rest of the world, New Zealand has a very strong econ­omy. In most ma­jor economies of the world, un­em­ploy­ment is ei­ther low, or at least track­ing down.

Nor­mally, that would mean ris­ing in­fla­tion and in­ter­est rates, but they have both re­mained low.

So, what’s go­ing on? Why is in­fla­tion laid low at an eco­nomic time when we would nor­mally ex­pect it to be up and danc­ing?

There is a range of fac­tors hold­ing down prices, from de­mo­graph­ics to the demise of the unions. How­ever, per­haps the big­gest fac­tor in one form or an­other is tech­nol­ogy. First, au­to­ma­tion is start­ing to re­duce costs in many busi­nesses.

For ex­am­ple, the cost of a welder at Ford Mo­tors is US$25 per hour, but for a robot it is just US$8 per hour.. Ac­cord­ing to BCG, the cost of that robot may fall to $2 per hour by 2030.

Sec­ond, e-com­merce (Ama­zon and the likes) means that we can eas­ily com­pare prices all over the world and buy the cheap­est. A book used to cost my house­hold $30 to $40. Now, with­out ever leav­ing the house and with just one click, I have them in­stantly de­liv­ered to my PC for less than $10.

Third, frack­ing and other oil re­cov­ery meth­ods have in­creased the sup­ply of oil and gas, which in most coun­tries (not New Zealand), has sharply low­ered the price at the pump. Five years ago, in the USA, a gal­lon of reg­u­lar was US$3.80 – to­day, it is less than US$2.40.

Fourth is the shar­ing econ­omy (Uber, Airbnb). These plat­forms have ef­fec­tively de­liv­ered car rides and ho­tel nights cheaply and with­out hav­ing to build new cars or ho­tels.

Tech­nol­ogy is keep­ing a lid on prices, and it’s a change which is struc­tural.

The chances are, in­fla­tion will re­main on its sick bed. There will be in­ter­est rate rises but they are likely to be small and no-one should ex­pect them back at 9 per cent any time soon.

Martin Hawes is the Chair of the Sum­mer Ki­wiSaver In­vest­ment Com­mit­tee. The Sum­mer Ki­wiSaver Scheme is man­aged by Forsyth Barr In­vest­ment Man­age­ment Ltd. You can ob­tain the Scheme’s prod­uct dis­clo­sure state­ment and fur­ther in­for­ma­tion at www.sum­mer.co.nz. Martin is an au­tho­rised fi­nan­cial ad­viser.

123RF

In­fla­tion ain’t dead but its re­cov­ery may take some time.

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