In today's email we ask where has inflation gone - and whether something structural changed to explain its continuing absence.
1. Where did the inflation go?
Yet again, inflation is proving to be weaker than the Reserve Bank and economists expect despite strong economic growth, apparent capacity restraints and skill shortages.
The end result is that interest rates are staying much lower than expected for much longer than expected. It also raises the question of whether something structural has changed in the global economy that is suppressing wage and price inflation, which would allow economies to run hotter without creating inflation -- if only central banks could let them run faster without creating dangerous asset bubbles.
Statistics New Zealand reported yesterday that Consumer Price Index inflation fell to 0.0 percent in the June quarter from 1.0 percent in the March quarter. Petrol prices fell 2.9 percent in Wellington and the South Island, and 1.7 percent in Auckland. Annual inflation fell to 1.7 percent from 2.2 percent in the March quarter.
Economists had expected quarterly inflation of around 0.2 percent and annual inflation of 2.0 percent so the result lowered expectations about an early start to rate hikes by the Reserve Bank. The central bank itself had forecast in May that there would be quarterly inflation of 0.3 percent and annual inflation of 2.1 percent. Before the release of the figures, most economists had expected the Reserve Bank to begin hiking the OCR from its current 1.75 percent level in the second half of 2018, although the Reserve Bank itself forecast in May that it would not start increasing the official rate until the second half of 2019.
The tradables index of the CPI fell 0.2 percent in the June quarter and was up just 0.9 percent from a year ago as fuel and other import costs were weak, in part due to a strong currency. The New Zealand dollar initially fell more than half a cent to 72.7 USc after the result, although it remains more than two percent higher on a Trade Weighted Index basis than the Reserve Bank's May forecast, effectively tightening monetary conditions. The currency bounced back by late on Tuesday.
Part of the surprise was that petrol prices in Wellington and the South Island fell more than expected. There has been a widening divergence (around seven percent) between Auckland and the upper North Island (where Gull stations are present) ,and the rest of the country (Wellington and South Island) over the last six years. However, petrol prices in the non-Gull regions fell more sharply in late June in the lead up to the release of a Government analysis of petrol prices, which found the petrol market in those regions may not be fully competitive. Many suspect the petrol companies cut prices to reduce political pressure ahead of the report's release.
This chart from Statistics New Zealand shows that Gull Effect over the last six years. The two lower lines are for Auckland and the rest of the North Island, where Gull competes with Z, BP and Mobil.
Non-tradables prices, which are the domestically influenced prices most closely watched by the Reserve Bank, rose just 0.2 percent in the June quarter (the lowest quarterly inflation in two years) and annual inflation fell to 2.4 percent from 2.5 percent in the March quarter.
Strong inflation in housing construction costs and rents was more than offset by cheaper hotel and motel rates and airfares. The non-tradable inflation was also lower than the 0.3 percent and 0.5 percent rises expected for the quarter by economists and the Reserve Bank respectively.
Perhaps surprisingly during a quarter that included most of the Lions tour, accommodation prices fell 8.1 percent and domestic airfares fell 15 percent.
I've gone into more depth on why the unnaturally low inflation might be structural in this longer piece published on Newsroom Pro.
This chart below via BNZ shows a disconnect between the Reserve Bank's measure of the 'output gap' and core non-tradable inflation since about 2011. The output gap measure is the Reserve Bank's estimate of where the economy is relative to 'full' capacity of employment and other resources. In theory, the economy should start generating inflation when it is running faster than its productive capacity speed limit. That hasn't happened in the last three years.
This suggests the Reserve Bank has under-estimated the productive capacity of the economy, perhaps due to the supply shocks from the globalisation of services via smart phones and record high migration of working age people. This forced it to reverse its 2014 rate hikes and then cut again last year.
2. 'Restart contributions immediately'
Labour announced last night it would immediately restart contributions to the New Zealand Superannuation Fund if it became Government and would keep the retirement age at 65.
Labour Leader Andrew Little said he planned to contribute $500 million in 2017/18 and increase contributions to $2.5 billion a year by 2021/22. National is not planning to resume contributions until 2020/21, having stopped them in 2009.
The New Zealand Superannuation Fund has estimated that if the Government had continued contributions from 2009 the fund would be almost $20 billion bigger now than the $35 billion it currently is.
Little said the resumption of contributions by a Labour Government would grow the fund to $63 billion by 2021/22.
“This would equate to $6,500 per person extra in the fund by 2021/22 under Labour. More importantly we can continue to afford to leave the retirement age at 65, unlike National which has promised to lift the age to 67," he said.
Prime Minister Bill English pledged in March to raise the age of eligibility for New Zealand Superannuation to 67 from 65 between 2037 and 2040. See my analysis from then of English's announcement on Newsroom Pro.
Little's pledge not to raise the retirement age was one of his key planks when he stood for the Labour leadership, saying Labour's previous policy of increasing the age hurt Labour in the 2014 election because many of its usual supporters opposed the older retirement age.
New Zealand First Leader Winston Peters said New Zealand First would restore contributions in full and he had never wavered on the retirement age.
"No party can be trusted on NZ Super, except NZ Super’s long standing friend - New Zealand First," he said.
3. Ron Mark's performance reviews
Newsroom Co-Editor Tim Murphy has produced an insider's guide to New Zealand First after attending its conference in Auckland over the weekend.
It includes Deputy Leader Ron Mark's assessment of the New Zealand First caucus, including a useful introduction for those wondering who might hold the balance of power and potentially be in cabinet after September 23.
Here's the full insider's guide on Newsroom.
4. Quotes of the day:
New Zealand First Leader Winston Peters criticising the Independent Police Conduct Authority over its decision not to investigate complaints against the police for dropping an investigation into allegations outgoing National MP for Clutha-Southland Todd Barclay secretly recorded his staff:
"In my view, the police haven't satisfactorily answered why they didn't pursue the case. They had complaints of a recording, they had a complainant and to the best of my knowledge we have not been told who they talked to or didn't talk to, but to say they're satisfied there was no misconduct is an extraordinary statement to make."
ACT Leader and Epsom MP David Seymour criticising Labour's threat to impose a diverted profits tax on multinational companies:
"Paying tax is just one way that multinational companies contribute to New Zealand. Their bigger contribution is employment opportunity, more choice for local consumers, and stronger international networks. New Zealand currently has the fourth highest tax on capital in the OECD. This tells businesses that they’re not welcome here."
5. Numbers of the day:
1.4 percent - The Reserve Bank's own preferred measure of core inflation, the sectoral factoral model, reflected the flat outlook for inflation. Annual inflation of this measure fell in the June quarter to 1.4 percent from 1.5 percent in the March quarter. This was the first fall since March 2015 and took the rate back to the level it was at in September 2015. Back then the OCR was at 2.75 percent.
$200 per week after tax - The Universal Basic Income promised to 18-23 year olds by Gareth Morgan's The Opportunities Party yesterday. It would replace the student allowance of $177 after tax. The policy, which TOP said was a step towards the ultimate goal of a UBI across all the population, is the third UBI rolled out since TOP's launch. It has also promised a $200 UBI for families with children under three or foster children up to six, and $200 for over 65s (with a means-tested top up to the current pension level).
TOP estimated the youth UBI for 338,000 would cost a net $2.4 billion after the existing cost of benefits and student allowances for this age group were removed, and after extra GST revenues were taken into account.
3.5 % - The Reserve Bank of Australia's new measure of the neutral level of its official interest rate, as revealed in its board minutes released yesterday. This was down 150 basis points from 2007 and above the current official rate of 1.5 percent.
12th largest - The Corrections Department has over 8,000 staff, making it the 12th biggest employer in New Zealand, according to this useful piece on the prison system by justice academic Jarrod Gilbert. There is a record high 10,300 people in prison at the moment, up 21 percent in the last three years. As Newsroom's Shane Cowlishaw reported last week, Corrections has been asked for options on reducing the prison population.
45 percent - Only 10 of the 22 properties put up for auction in Auckland by Harcourts last week were sold, giving a clearance rate of 45 percent. The rest were either passed in or subject to vendor's bids. Barfoot and Thompson's clearance rate for 116 properties put up for sale in Auckland last week was 43 percent, Interest reported. Clearance rates for Auckland auctions before the Reserve Bank announced new tougher LVR rules just over a year ago were around 65-70 percent.
6. While you were sleeping
China announced overnight its banking regulator would tighten controls over risks in financial markets and China's debt-riddled financial sector. The announcement aimed at reducing "chaos" in China's shadow banking sector came after President Xi Jingping attended a key once-every-five years Government work conference. The unusually tough comments coming out of the conference unnerved China's financial markets this week, despite stronger than expected GDP figures. (Reuters)
7. Coming up...
Labour is scheduled to release the remainder of its fiscal plan in Wellington later this morning, having detailed its own family incomes package last week. It is expected to be in line with the Budget responsibility rules it agreed with the Greens in late March, which included an operating surplus over the cycle and reducing net debt to 20 percent of GDP within five years. It is expected to include an announcement on health spending and a new levy.
I always learn something interesting when reading Tim Murphy's pieces on Newsroom. One of the quirkier things I found at the bottom of his piece (referred to above) summarising Ron Mark's performance reviews of NZ First MPs was that Mahesh Bindra is the global coordinator of the World Hindu Democratic Forum and has organised for Winston Peters to speak at the World Hindu Congress in Chicago in September 2018.
8. Two fun things
This cartoon from Rod Emmerson contrasting the approaches of Metiria Turei, Paula Bennett and Todd Barclay towards WINZ is well worth a click.
This tweet from March from New York Post Op-Ed editor Seth Mandel on the Republican health care bill (which lost the numbers to pass the Senate yesterday) seemed prescient:
"They're going to waste tons of political capital not passing this bill & it's going to be as if two dumpster fires had a baby dumpster fire."