Inflation expectations ease in survey

Reserve Bank Governor Dr Alan Bollard. Photo / Mark Mitchell

Inflation expectations have fallen from menacing levels in the Reserve Bank's latest quarterly survey of expectations, despite respondents taking a more optimistic view of the growth outlook than they did three months ago.

Expectations of inflation two years ahead dropped back to 2.86 per cent, having jumped to 3 per cent in the previous survey, a level equalled only once since inflation was brought under control in the early 1990s.

The result seems to vindicate one of the key assumptions in the bank's June monetary policy statement that "recent increases in surveyed inflation expectations will be short-lived".

The annual inflation rate hit 5.3 per cent in June, of which 2 percentage points could be explained by the increase in GST last October.

"The easing in two-year ahead inflation expectations reduces some of the pressure on the Reserve Bank in regards to inflation risks in the economy," ASB economist Christina Leung said. "There had been some concerns the high headline CPI may have flowed through to higher medium-term inflation expectations and affect wage and price setting behaviour."

Nonetheless, the Reserve Bank was likely to remain vigilant, she said.

Survey respondents' expectations for growth over the year ahead have jumped to 2.9 per cent from 2.1 per cent three months ago. Growth the following year is also expected to be 2.9 per cent, up 0.1 percentage points from the previous survey.

The pick-up in growth, from just 1.4 per cent in the year ended March 2011, is expected to bring the unemployment rate down from its current 6.5 per cent to 5.9 per cent a year from now and 5.5 per cent a year after that.

Wage inflation expectations have also firmed, to 2.9 per cent over the coming year (from 2.5 per cent in the previous survey) and 3.9 per cent the following year (3 per cent last time).