Some are celebrating that the inflation war has been won but is it too soon to party? Photo / Getty Images
Some are celebrating that the inflation war has been won but is it too soon to party? Photo / Getty Images
Opinion by Liam Dann
Liam Dann, Business Editor at Large for New Zealand’s Herald, works as a writer, columnist, radio commentator and as a presenter and producer of videos and podcasts.
There are problems with this narrative - and I say that despite very much wanting it to be true.
The first is that, even if it’s right, it doesn’t change the fact that consumers, here and in the US and Europe and everywhere else, are still battling the cost of living.
Being past a peak doesn’t guarantee a speedy return to the ideal inflation target of 2 per cent.
Prices are still rising, just at a slower pace. So too are interest rates. The US Fed actually lifted rates last week to the highest they’ve been since 2007.
And it warned there was more to come.
The real mortgage pain and an economic slowdown are still ahead in America.
There is also plenty of time for the data to disappoint on the way down.
If it all takes longer than expected, and the time frame for rate cuts gets pushed back, then markets will not be happy and we could see another sell-off.
Right now a narrative has taken hold with financial markets that inflation is falling faster than expected.
Sharemarkets have roared back into life with the Nasdaq now up almost 20 per cent, year to date. Photo / AP
Faster than who expected? Markets also have short memories.
Inflation certainly isn’t falling faster than the market expected this time last year.
This time last year there was a strong expectation that it would all be well and truly back under control by now.
Those expectations were dashed as the year progressed by events like the Ukraine war.
But events, as they say, do keep happening. I predict we’ll see more of them.
Basically, the world seems to have flip-flopped from an overly optimistic outlook to an overly pessimistic one.
And now, in my cynical old view, we’re in danger of heading back to an over-optimistic outlook.
That’s markets I guess, highly efficient except for that bit where emotive human behaviour makes them swing too far in either direction ... all the time!
I hope central banks can retain a more dispassionate view on it all. The US Fed sounded pretty resolute and so to does the Reserve Bank.
We all want a soft recession-free landing, but having come this far we need to finish the job and ensure the inflation genie is back in the bottle.
The other problem with the “inflation’s beaten” is, as I mentioned above, New Zealand hasn’t yet joined the party.
In US, the annual inflation rate has fallen slowly but steadily from 9.1 per cent in the middle of last year to 6.5 per cent.
In New Zealand, we’ve seen it plateau since the middle of last year - stuck at 7.2 per cent for the past two quarters.
At least we are now in better shape than our friends across the Tasman.
Australia’s inflation rate is now 7.8 per cent and is yet to show clear signs of even plateauing.
Actually, I’m not really sure why that matters other than that some commentators seemed to get very animated about the difference last year when our inflation rate was higher.
We all - the US, Europe Australia and everywhere else - have our own local twists and variations to put our inflation tracks on slightly different paths.
Mostly it’s just about timing. The major western governments and central banks all followed roughly the same prescription of pandemic stimulus followed by an orthodox monetarist response.
The monetarists got upset about the stimulus and the Keynesians are upset about the extent of rate hikes.
Personally, I’m down with the kids. I like a mash-up. It’s the 21st century and if hip-hop artists want to mix their beats with country music and policy makers want to pick tools from both sides of the economic playbook - that’s all fine with me.
I was always of the view that inflation was going to take one or two years to clear post-pandemic.
But I also saw inflation as transitory, in the sense that it was a specific outcome of the pandemic.
The two things needn’t be mutually exclusive.
It’s just a longer cycle than any wanted but that’s because the pandemic was a huge historic disruption on a scale we’ve never seen in our lifetimes.
It’s baffling to me how many people seem to have already forgotten that bit.
In New Zealand - as has been endlessly debated - closed borders created a bigger issue with labour supply putting more price pressure on plenty of things - including food.
But we’ll get there. Migration is picking up.
There were positive signs of an inflation peak buried in both the recent Consumer Price Index and the labour market data.
Economists are feeling hopeful enough to revise their expectations for Reserve Bank’s next OCR hike - down to 50 basis points, from 75.
The flooding in Auckland hasn’t shifted that view although, clearly, it is going to deliver a localised inflationary shock.
It’s not a technical term but the rain has sucked.
Workers clean up a slip on West End Rd in Herne Bay, Auckland, after storms and flooding. Photo / Alex Burton
Beyond the obvious human costs, we now face added capacity pressure in an economy that was finally, just, easing to come back from running at capacity.
It’s going to be very frustrating for Auckland consumers.
Food production, transport, building and construction, rents and even used cars are all going to face added price pressure.
It’s not a one-sided equation. There are recessionary impacts to be considered.
Disasters are always a net cost to the economy eventually, but the time frame is long.
The inflationary impacts will be more acute - hopefully short and not too sharp.
It’s easy to be negative after a horrible sodden week in Auckland.
But there are some grounds for celebrating the good news out of the US.
Even if it is being overplayed by Wall St, the global economy is rebalancing.
New Zealand markets are being swept along in the euphoria. Our KiwiSaver accounts will be looking much improved.
The IMF this week raised its outlook for global growth in 2023.
Let’s stay cautious but it is looking like a soft landing is possible.
