Inflation remains the problem

Well, the RBNZ raised it again. As an industry geek, I read the RBNZ Monetary policy statement and watched the live stream announcing the 50 bps increase to the OCR which now sits at 4.75% and want to unpack what I noticed from the day last week as I don’t believe the media picked up on it too well.

For lack of a better word, there is a “fear” that the cyclone damage could cause entrenched inflation. Sadly this event happened at a time that doesn’t suit economic conditions. My heart goes out to all those affected. I think we are yet to see the total loss of people. A horrible thing to have occurred and the RBNZ being strictly financial mentioned a few comments to cover off what it could mean in an economic sense.

Simply put we have a lack of people to meet job constraints. Then, we have inflation expectations remaining high. Notably, the RBNZ head economist almost begged people to look through the pressure this could put on wages and prices and not increase them further due to fresh demand created by cyclone damage. Stating, this pressure will pass and if we don’t treat it like that, the rise in demand for these things required to build back and repair could become entrenched in higher for longer inflation.

The problem I see is that the age-old economic truth will come into play – supply and demand.

If someone is willing to pay you more to do the job of fixing up a house then you will take that job over the one that won’t. Meaning prices go up. Same with Cars. Can you see Car Dealers not increasing their prices now there is a fresh group of 5,000 buyers flush with insurance payouts to spend? I didn’t think so. I have a hard time believing the same people (Us, as polled by various companies) that expect inflation to continue, will listen to the RBNZ and say “Yep, they are right, let’s not increase our prices”.

So the concern is that our “Transitory inflation” (yea remember that) is getting yet another extension. The RBNZ did say they are still on track for a 5.5% peak in the OCR which they have said a few times now and reinforced it will be this year. What comes after that is hard to say. I do still expect rates to fall late in the year or Q1 ‘24. But, as we can see with the cyclone. You can never allow for these things in predictions that can change the course of any forecast.

In some lighter news, I have recently changed the way my own place looks thanks to Tivoli Road Interiors. A mood board specialist that you can send pics of your home and they will redesign your place with furniture and colour recommendations. If you are wanting to spruce up your place in a time where “feel good” is important, this is a cost-effective way to do so. I would recommend it. Website here.

Finally, I will finish by touching on the “Inverted yield curve” that has been talked about everywhere since I started on it last year (I’m flattered). As predicted previously, all other banks have followed that first bank. Across the board, we are seeing the 1yr rate priced higher than the 5y rate (And now even the 2yr and 3yr). A strong indication that money markets believe a rate decrease is on the horizon. Likely within 12-18 months. Let’s see. These things can take time or happen quickly.

Cheers and again, best wishes to all those affected by the weather events. It is devastating to see, but I proudly back Kiwis in times of adversity.

Mikey Smith – Managing Director, Guardian Smith