New Reserve Bank survey shows business inflation expectations rising

Businesses expect the value of a dollar to keep falling. Photo / Mark Mitchell

• The Reserve Bank’s Survey of Business Expectations shows increased Consumers Price Index inflation expectations across all time horizons.
• Average one and two-year inflation expectations remain below the Reserve Bank’s 3% upper target band.
• Businesses’ wage growth expectations declined, with a notable decrease in one-year-ahead wage inflation expectations.

The Reserve Bank has released the results of its first Survey of Business Expectations.

Business expectations for annual Consumers Price Index (CPI) inflation increased across all time horizons, the survey found.

However, the average expectation, across both one and two-year terms, remains below the crucial 3% upper band of the RBNZ’s target for inflation.

Average one-year-ahead annual inflation expectations increased from 2.25% to 2.44%.

Average two-year-ahead inflation expectations increased from 2.47% to 2.54%.

CPI is currently 2.5%, although rising food prices are expected to put some upward pressure on that figure in the medium term.

Economists remain confident inflation won’t rise above 3% because of the lack of demand in the economy and low growth prospects.

One-year-ahead annual inflation expectations increased across most industries, the survey found.

Businesses in construction, manufacturing, retail and other industries reported increases in one-year-ahead inflation expectations to 2.36%, 2.35%, 2.36%, and 2.53%, respectively.

In contrast, businesses in the primary industry reported a decrease in one-year-ahead inflation expectations, from 2.14% last quarter to 1.44% this quarter.

Businesses’ expectations for wage growth declined, particularly for one year ahead.

The weighted average one-year-ahead annual wage inflation expectation was 2.59%, a decrease of 25 basis points from 2.84% last quarter. The weighted average two-year-ahead annual wage inflation expectation decreased by 2 basis points from 3.21% last quarter to 3.19% this quarter.

Expectations around unemployment were steady. The weighted average one-year-ahead unemployment rate expectation decreased by 3 basis points from 5.16% last quarter to 5.13% this quarter.

But the weighted average two-year-ahead unemployment rate expectation increased by 4 basis points from 4.82% last quarter to 4.86% this quarter.

The new quarterly survey is the third RBNZ expectations survey but the first to focus solely on business.

The others are the Household Survey of Expectations, which has run since 1995, and the Survey of Expectations, which has run since 1987 (it focuses on the views of experts, such as professional forecasters, economists, and, currently, industry leaders).

The target sample size is 450 responding businesses each quarter. Firms are picked at random from Stats NZ’s Statistical Business Register.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist and also presents and produces videos and podcasts. He joined theHerald in 2003.