The RBNZ’s latest Survey of Expectations showed that expectations for inflation over the coming years remain elevated. However, the trend higher seen in recent months looks to have been arrested, with expectations easing at some of the key medium-term horizons. That will leave the RBNZ feeling more comfortable that the risks of high inflation becoming embedded in the economy are easing off.
Details
Inflation expectations
- One year ahead: 4.86% (Prev: 4.88%)
- Two years ahead: 3.07% (Prev: 3.29%)
- Five years ahead: 2.33% (Prev: 2.42%)
- Ten years ahead: 2.13% (Prev: 2.11%)
Details
The RBNZ’s latest Survey of Expectations showed that expectations for inflation over the coming years remain elevated. However, the trend higher seen in recent quarters looks to have been arrested, with expectations easing at some of the key medium-term horizons
Looking at the details of today’s report, expectations for inflation one year ahead held steady at 4.9%. Expectations at this short horizon tend to follow actual inflation closely. And with the latest survey coming hot on the heels of the monster 7.3% inflation outcome in the year to June, that lack of movement will be welcome news for the RBNZ.
The bigger focus for the central bank is expectations over longer horizons (two or more years ahead). Historically, those have been a better guide to how businesses will adjust prices and wages, and signal if the inflation target is viewed as credible. On this front, today’s news will also have been welcomed by the central bank.
The closely watched two-year ahead measure pull back to 3.1% (from 3.3% last quarter). Similarly, the five-year ahead measure softened to 2.3% (from 2.4% previously), while expectations for inflation in 10 years’ time remained steady at 2.1%.
Implications
Today’s easing in inflation expectations will leave the RBNZ feeling more comfortable that the risks of high inflation becoming embedded in the economy are easing off. That is particularly important given the current multi-decade high in actual inflation and related risks of a wage-price spiral.
Even so, today’s survey still points to strong inflation pressures in the New Zealand economy and reinforces the case for rate rises. We’re forecasting another 50bp rise at next week’s RBNZ policy meeting.
