Near term inflation expectations have dropped back, but longer-term expectations are up.
Inflation expectations
- One year ahead: 2.05% (Prev: 2.40%, down 35 points)
- Two years ahead: 2.12% (Prev: 2.03%, up 9 points)
- Five years ahead: 2.24% (Prev: 2.07%, up 17 points)
- Ten years ahead: 2.19% (Prev: 2.03%%, up 16 points)
The latest survey of inflation expectations was a mixed bag, but is unlikely to cause much alarm at the RBNZ about either the up or downside risks for inflation. On balance, inflation expectations look consistent with the RBNZ’s medium-term inflation target.
In the detail, expectations for inflation over the coming year have dropped sharply, falling to 2.05% (down from 2.4% previously). That’s consistent with the sharp falls in actual inflation over the past year and our forecast that inflation will remain close to 2% over the coming year.
However, inflation at longer horizons has picked up. Notably, the closely watched measure of expected inflation in two-years’ time has increased to 2.1% (up from 2% last quarter). We also saw expectations for inflation 5 and 10 years ahead rising to 2.2% (both up about 20 ppts compared to the previous survey).
The lift in longer-term inflation expectations follows sharp falls last quarter and leaves them at levels that are still close to the RBNZ’s target.
Overall, we think that today’s survey and other recent data will leave the RBNZ feeling comfortable that pricing behaviour is now well aligned with their medium-term target. Consistent with that, we expect that the RBNZ will deliver another 50bp rate cut next week.
But even with inflation expectations looking well contained, today’s survey highlights that the risks for inflation are not all in one direction. While inflation has fallen sharply over the past year (especially in relation to import prices), we are still seeing strong increases in some domestic costs (like local council rates and insurance chares). Those continued cost increases are limiting the decline in overall inflation. And with related risks for inflation expectations, such costs warrant continued close attention as we head into the new year. We expect that the RBNZ will adopt a more gradual and data dependent approach to policy changes next year.
