In today's email we ask why inflation remains stubbornly low, and we discuss the busy weekend had by New Zealand First and The Greens.
1. Where's the inflation?
Despite all the talk of normalising interest rates globally and labour shortages locally, inflation has been stubbornly low all over the world and in New Zealand too.
It is the big economic mystery of our age: where is the inflation? Wage inflation remains strangely dormant despite unemployment being under five percent in both the United States and New Zealand. That also means interest rates are not rising much in the face of solid economic growth. The 'Trump Bump' in interest rates of late last year on hopes of an economic growth surge driven by Trump-triggered tax cuts and infrastructure has faded.
New Zealand will get a taste of just how weak inflation remains on Tuesday when Statistics New Zealand releases the Consumer Price Index figures for the June quarter.
Economists expect inflation was around 0.1 to 0.2 percent in the June quarter, which is down from the 1.0 percent seen in the March quarter. That would take the annual rate down to around 1.8 to 1.9 percent from 2.2 percent in the March quarter. That's also below the 0.3 percent and 2.1 percent the Reserve Bank forecast for the June quarter and June year in its May Monetary Policy Statement.
That's largely due to a slump in petrol prices during the quarter, which was deepened slightly by falls in prices and margins just before the release of the Government's retail fuel market study at the beginning of July.
Offsetting that was a 9.3 percent rise in fruit and vegetable prices over the last year and inflation in housing and construction costs. But inflation in the rest of the economy remains subdued.
The biggest mystery is with wage inflation, which is also weak outside of the construction sector despite widespread talk of skills shortages. The ripple effect of the Government's $2 billion pay equity deal for aged care workers that kicked in from July 1 is one of the few widespread forces driving up wage inflation from below two percent.
The end result for now is that official interest rates remain near record lows and show few signs of picking up any time soon. The Reserve Bank's last forecast in May was that it would not be increasing the Official Cash Rate from 1.75 percent until late 2019. Financial markets and economists expect rates to start increasing in the second half of 2018 or early 2019.
Other forces are also blowing headwinds into the economy to help the Reserve Bank control any inflationary pressures. The New Zealand dollar rose 2.6 percent on a Trade Weighted Index basis during the June quarter, whereas the Reserve Bank had expected it to be flat.
Banks have also tightened their lending criteria, in part due to the Reserve Bank's new 40 percent deposit requirement for landlords, but also because of their own funding pressures. Banks also increased their mortgage rates by around 20 basis points in the March quarter, although they have been flat since then.
The pressure on banks to increase their profit margins and slow their lending growth was reinforced on Friday when the Reserve Bank released a consultation paper on what should be considered bank capital. The paper suggested options that would effectively force banks to hold more simple and expensive types of capital.
These two tightening influences on monetary conditions of higher mortgage rates and a higher currency have only been slightly offset by a slight loosening of fiscal policy in the May Budget.
The net result is that despite signs of inflation in housing and construction costs and often-repeated predictions of wage inflation, there are few signs of inflationary pressure that would force a quick and steep rise in interest rates in the next couple of years.
2. Winston in buoyant mood
The Greens and New Zealand First held annual conferences over the weekend, with both announcing election policies and gearing up for the vote in 67 days time.
New Zealand First Leader Winston Peters began in buoyant mood after UMR's most recent polling for Labour was leaked to Newshub's Patrick Gower. It showed Labour slumping eight percentage points to 26 percent from 34 percent in May, while New Zealand First rose five points to 14 percent.
That put New Zealand First ahead of the Greens on 13 percent, a rise of two points from May. National fell one point to 42 percent.
However, the UMR result contrasted with the Roy Morgan poll, which came out on Friday night and showed Labour up five percentage points to 30.5 percent, New Zealand First down one point to 8.0 percent and Greens support down 0.5 percent to 13.5 percent. Support for National fell 3.5 percent to 43 percent.
Peters was particularly upbeat in his conference-ending speech in Auckland on Sunday.
"This time, in our 24th year, we are going to transform the electoral system. We will be, most definitely, the Government," he said.
"This is a fight between three different movements - National, New Zealand First and the Labour-Greens combination. This is a fight, a battle for New Zealand and we intend to win it."
Peters is certainly on a roll, pulling big crowds to his events in provincial centres and tapping into concerns about record high net migration, foreign buying of property and stagnation in some regions.
He reiterated New Zealand First's policy of holding a referendum on abolishing the Maori seats and reducing the number of MPs.
One fun thing Tim discovered at the conference. New Zealand First's T-Shirts are made in China.
3. A big policy and a confession
Meanwhile, the Greens announced a major welfare and tax policy on Sunday, along with an unusual confession from co-leader Metiria Turei.
The minimum wage would go up to $17.75 an hour in year one under a Green Government and keep rising to more than $21 over time. And there would be a new top personal tax rate of 40 percent for those on $150,000 and over a year.
Turei also confessed in her speech to having not told social welfare officials that when she was receiving the Domestic Purposes Benefit she had had flatmates who paid towards the rent.
4. $1 bln in unpaid child support
Speaking of penalties and amounts owed to WINZ and the Government, Newsroom's National Affairs Editor Shane Cowlishaw reported exclusively for Newsroom Pro on Friday that almost $1 billion in child support payments is owed by people living overseas.
Documents obtained by Shane under the OIA show there is $3.2 billion of child support owing, with $909m owed by overseas parents and $1.5b owed domestically.
The remainder is made up of debt owed to non parent carers and parents now based in Australia, along with debt owed by employers who hadn't deducted from liable parents' wages.
Find out more in Shane's full article.
5. 'Love has consequences'
The Government hasn't won many friends in the disability community in recent months, and may have dug itself a bit deeper late last week with some unfortunate comments by a back-bench MP.
Newsroom's Lynn Grieveson reports from an election meeting on disability issues that National MP for Wairarapa Alastair Scott made some jarring comments about means testing that were seen as unsympathetic. Currently, people with disabilities lose their allowance when they move in with someone not on an allowance.
Asked if National would consider removing the means-testing of spouses under the supported living payment scheme, Scott said: "I think I covered it earlier - when you fall in love there are consequences."
The remark drew gasps from the audience.
"The benefits are based on household incomes, not so much on individual incomes, that's the main point. There is no policy decision to change it at this point."
6. Rental property legislative reform
Newsroom likes to go into the depths of new legislation that is going through Parliament, to understand the pros and cons and the positions of the various parties.
Baz Macdonald, a journalism student who worked with us last week, has done an indepth piece on a bill to amend the residential tenancies law that has passed its first reading and is now in the select committee stage.
Essentially, the amendments overrule two recent court decisions against landlords and allow landlords the right to get into properties to test for meth, albeit with standards that are less sensitive to meth usage (rather than meth production).
The Opposition would have preferred tenancies reform to bring in a Warrant of Fitness system, which the Government has argued would cost $100 million and be passed on in higher rents.
See Baz's piece in full, which was published on Newsroom Pro on Friday.
7. Coming up...
Foreign Minister Minister Gerry Brownlee announced UK Foreign Secretary Boris Johnson would visit Wellington from July 23 to July 25.
Reserve Bank Deputy Governor Geoff Bascand will deliver a speech today on: ‘New Zealand’s net foreign liabilities: What lies beneath, and ahead?’ The speech text and a news release will be published at 1.30 pm today.
Parliament is not sitting this week.
8. Two fun things
Donald Trump is the gift that keeps giving. Here's him defending his son's contacts with someone Donald Junior was told worked for the Russian Government and wanted to help get Donald Senior elected:
"When they say "treason" -- you know what treason is? That's Julius and Ethel Rosenberg for giving the atomic bomb, okay?"
The Rosenbergs were convicted of espionage for the Soviet Union (rather than treason) and executed in 1953. (Time)
In an indicator that many of America's allies seem less reluctant to criticise America's new President, Australian Foreign Minister Julie Bishop took a swipe at Trump's comments on the "good physical shape" of French First Lade Brigitte Macron last week.
Bishop said she would be "taken aback" if Mr Trump said something similar to her.
"It's a rather interesting comment to make. I wonder if she could say the same of him?" Ms Bishop told the ABC's Insiders program. (SMH)