Low for a long time

This week we take a look at what’s been happening to inflation and why we think the RBNZ is facing an uphill battle. Inflation has been below the RBNZ’s target band for a year now. And although the fall in the exchange rate since mid-2015 will result in some lift in prices, a sustained pick-up in inflation back to 2% still looks elusive. The main reason for this is that domestic growth is set to slow, which will result in continued downwards pressure on prices.

Last week was another quiet one in New Zealand in terms of economic developments. Among the limited data that was released, the standout was net immigration figures for October which, once again, rose to a record level. Strong growth in the population over the past year has boosted spending, and is one reason why business activity has held up in recent months.

But while we’re seeing signs of firmness in activity right now, the same can’t be said for inflation. At just 0.4%, annual inflation is only slightly higher than the 15 year low it reached earlier this year. And this isn’t just a result of a few volatile items like petrol. Core inflation, which strips out such volatility, has lingered at low levels for several years now, and has only shown faint signs of picking up.

Other measures of inflation tell a similarly muted story. Producer price indices and surveys of business costs remain subdued. Retail prices have effectively been flat since 2010. And inflation expectations, which are key influences on wage and price setting decisions, remain at low levels compared to history.

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