Inflation expected to get back in its box in two years

Experts see the annual inflation rate falling below 3 per cent in two years' time. Photo / Mark Mitchell

Business leaders and professional forecasters are increasingly convinced inflation will eventually get back in its box.

They see the annual inflation rate falling to 4.28 per cent in a year’s time and 2.78 per cent in two years’ time, according to the results of the Reserve Bank’s latest quarterly Survey of Expectations.

The survey, which included 32 business leaders and professional forecasters, was done between April 21 and 28, following Stats NZ reporting the consumers price index (CPI) rose 6.7 per cent between the March 2022 and 2023 quarters.

The survey marked the first time since 2021 that respondents saw the two-year out annual inflation rate falling below 3 per cent.

When they were last surveyed in late-January, the average respondent saw the rate falling to 5.11 per cent in a year’s time and 3.30 per cent in two years’ time.

ANZ chief economist Sharon Zollner said the results would come as good news to the Reserve Bank, which has been aggressively hiking interest rates to try to bring the inflation rate back within its 1 to 3 per cent target range.

Its chief economist Paul Conway, in a speech delivered in March, warned that if businesses, households and the Government didn’t lower their expectations around profit margins, wage growth and spending, inflation would persist, interest rates would need to remain high, and the economy would take a greater hit.

The Reserve Bank has already lifted the official cash rate (OCR) by 500 basis points, to 5.25 per cent, since late-2021, as inflation has been above its target range for nearly two years now.

While the survey results tracked in the right direction, Zollner believed they wouldn’t stop the bank from hiking the OCR one more time on May 24 to 5.5 per cent.

This aligned with the view of the majority of respondents.

Meanwhile, the average estimate for where the OCR would land in a year’s time was 4.84 per cent. This was 16 basis points below last quarter’s estimate for where the OCR would be in a year’s time.

As for annual wage growth, the average respondent saw this hitting 4.80 per cent over the next year – a slower rate than the 5.51 per cent estimated last quarter.

This was the first drop in expectations since June 2020.

The average two-year ahead annual wage inflation expectation also decreased from the last survey to 3.53 per cent.

Like Zollner, Westpac senior economist Satish Ranchhod believed the Reserve Bank would welcome the results.

“Expectations play a central role in how businesses adjust their prices and wages,” he explained.

“And the creep higher that we saw over the past few years has added to the risk of a wage-price spiral, which would mean that the current period of high inflation could end up being even more protracted.

“But this doesn’t mean that the Reserve Bank’s job is done. Inflation remains elevated. And while expectations have softened, they remain above the 2 per cent mid-point of the Reserve Bank’s target band.

“The Reserve Bank will also be keeping a close eye on some other factors that might add to longer-term inflation pressures. That includes the upcoming NZ Government Budget [out on Thursday, May 18] and the ongoing rapid rise in net migration.”

The New Zealand dollar fell against the US when the Reserve Bank published its survey at 3pm on Friday.