Inflation shocker, thief on the loose.
This week saw the release of inflation data for the September quarter and it was a shocker.
Inflation is an insidious ‘thief in your wallet’, to quote a former Reserve Bank Deputy Governor, eroding purchasing power and savings and distorting decisions on spending and investment.
The thief is becoming increasingly bold and brazen, with Consumer Price Index up 2.2% in the September quarter and up 4.9% for the year to September. Both were much stronger than anyone expected.
Apart from the one-off impacts of GST hikes this was the biggest quarterly increase since June 1987’s 3.3% and also the biggest annual increase since the year to September 2008’s 5.1%.
Housing and household utilities rose 2.6% in the quarter and 6.0% for the year; transport rose 4.2% in the quarter and 13.2% for the year; food rose 2.7% in the quarter (and 3.1% for the year), and recreation and culture rose 2.9% in the quarter (and 5.3% for the year).
Businesses have been experiencing intensive cost pressures and this is now spilling into higher consumer prices, threatening a 1970s and 1980s price-wage spiral. Farmers are feeling it too with big recent jumps in fertiliser, fuel, and electricity prices as well as creeping increases in business overheads.
Although COVID-related supply chain shocks have helped drive up inflation, increases in prices seem widespread indicating higher inflation might be more enduring rather than just a one-off blip. Economists are now expecting annual inflation to exceed 5% in the December quarter, which risks imbedding higher inflationary expectations.
Government policy is not helping. More and more costs are being imposed on businesses, directly or indirectly through, for example, big increases in the minimum wage and immigration restrictions driving up labour costs; a surging ETS pushing up fuel and electricity prices; residential tenancy and housing tax changes causing rent hikes; and tighter regulation or threats of tighter regulation across multiple policy fronts to meet the Government’s ambitious reform agenda including in the agricultural space.
Meanwhile, the Government’s fiscal policy has contributed to overheating the economy and exacerbating supply-demand imbalances. Although it certainly had to support the economy during Covid it has spent big over the past four years, with core Crown expenses up 41% from 2017 to 2021. The abandonment of its first term fiscal rules after last year’s election was disappointing.
And it’s not just central government, with local authority rates and payments up 7.1%, in the September quarter – more than double the 3.1% increase in September 2020.
The Reserve Bank has rightly started on the path to normalising monetary policy but if higher inflation is allowed to bed in it’ll be forced to hike interest rates even more than would otherwise be the case. This would be painful for borrowers and could drive up the exchange rate, hitting exporters.
Politicians, from central and local government, need to get serious about inflation and help the Reserve Bank put the thief back in jail before it can steal anymore of our hard earned money.
In short, monetary policy needs mates.
Dairy prices up.
This week’s Global Dairy Trade auction posted a 2.2% increase providing some welcome good news for farmers and regional economies.
All commodities on offer were up in price compared to a fortnight ago. Whole milk powder was up 1.5%, skim milk powder up 2.5%, anhydrous milk fat up 2.5%, butter up 4.7%, cheddar up 2.9%, and lactose up 5.9%.
The average selling price was US$4,061 and 27,836 tonnes were sold.
Compared to the same time last year the GDT Price Index was up 29.4%. After dipping from March to August a recent run of increases has taken the GDT Price Index back to where it was in June.
Economists are increasingly expecting a Fonterra milk price of over $8 per kg MS for the 2021/22 season. This would boost farm incomes but inflationary pressure on farm inputs and increasing interest rates could take off some of the gloss.
Farm sales volatile.
The market for farms is reflecting volatility in the rural sector, according to the Real Estate Institute of New Zealand’s latest monthly Rural Market Statistics.
There were 264 farm sales in the three months ended September 2021, down 17.8% on the three months ended August 2021 and down 27.5% on the three months ended September 2020.
For the full year to September 2021 there were 1,667 farms sold, up 33.4% from the year to September 2020. Dairy farm sales were up 165.1%, Dairy Support down 1.0%, Grazing farms up 20.3%, Finishing farms up 39.1%, and Arable farms down 46.3%.
The median price per hectare for all farms sold in the three months to September 2021 was $31,300, up 15.2% compared to the three months to August 2021 and up 22.5% on the three months ended September 2020.
Meanwhile, the REINZ All Farm Price Index, which adjusts for differences in farm size, location, and farming type, was up 0.1% compared to the three months to August 2021 and up 13.9% on the three months ended September 2020.
The seasonally-adjusted PMI for September was 51.4, up 11.7 points from August. BusinessNZ noted that this is still around 10 points below its levels before August’s lockdown and that while the South Island’s activity has swiftly returned to pre-August levels, the North Island is still in contraction. A PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining.
Meanwhile, the PSI for September was 46.9, up 11.5 points. BusinessNZ said ‘that despite the improvement in the overall result for September, current restrictions still mean business as usual for most of the country is still a ways off yet’.
Households savings negative.
Statistics NZ’s National Accounts (income, saving, assets, and liabilities) for the June 2021 quarter showed household saving at a negative $225 million.
After being strongly positive in 2020 due to Covid-19 and associated restrictions, household saving in 2021 has been negative. This reflects household consumption expenditure being higher than net disposable income.
Despite this the household sector’s net worth increased by $13.0 billion (0.6%) with the value of household assets increasing a little more than their liabilities.
For the business sector gross operating surplus and gross mixed income (which are similar to business profit) rose 4.0% in the June quarter, following an increase of 1.7% in the March 2021 quarter. On an annual basis, gross operating surplus and gross mixed income were up 3.1% for the year ended June 2021.
NIWA Soil Moisture Data.
NIWA’s latest soil moisture maps (as at 9am Thursday 21 October) continue to show most of the country’s soils with about average or wetter than usual moisture levels for this time of year. There are only a few isolated pockets of dryer than usual areas, such as in the Bay of Islands, Hastings, and lower Waitaki.
The NZ Dollar had a strong week, up 2.6% against the Trade Weighted Index. It was up against all our major trading partner currencies.
The expectation of higher interest rates after this week’s stronger than expected CPI will have been a factor. But positive news such as the latest GDT increase and the UK-NZ FTA announcement might also have boosted sentiment.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week, the yield for the 90 Day Bank Bill was up six points to 0.74%, while the 10 year Government Bond yield rose 27 points to 2.37%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 24 November. This week’s stronger than expected CPI is raising market expectations of more OCR increases over the coming months.
|This Week (21/10/21)||Last Week (14/10/21)||Last Month (21/9/21)||Last Year (21/10/20)|
|90 Day Bank Bill||0.74%||0.68%||0.61%||0.27%|
|10 Year Government Bond||2.37%||2.10%||1.84%||0.56%|
Source: Reserve Bank of NZ