Could there be Demand-Pull inflation in New Zealand?

The recent GDP figures the March Quarter 2021 and the Annual figure were significantly different from those predicted by the Reserve Bank. The key component of GDP is Private Consumer Expenditure which increased way above the 0.5% of the RBNZ – see table.

This no doubt encouraged more investment which saw an increase by 15.5%. This suggests that the economy is creeping towards the threat of demand-pull inflation – i.e. the economy is running hot and demand is outstripping supply – see graph.

Source: BNZ Markets Outlook.

While New Zealand’s GDP growth might pale against global comparisons this year, it’s already strong enough to be telling of rapidly diminishing economic slack and rising core inflation. Indeed, that excess demand is now arguably the order of the day in NZ, partly as the ability to supply goods and services is compromised in many ways, compared to pre-COVID times.

Furthermore the weakening NZ$ – has made exports cheaper. This is also part of the overall aggregate demand in the economy. So with C+I+G+(X-M) all increasing there is pressure on the supply-side. The NZ trade-weighted exchange is at 73.2 this morning whilst the RBNZ forecasted 75.3. However predicting anything in an economy today is very difficult considering what we have experienced with COVID 19.

TWI – An index that measures the value of $NZ in relationship to a group (or “basket”) of other currencies. The currencies included are from NZ’s major export markets i.e. Australia, USA, Japan, Euro area, UK, China. – $A, $US, ¥, €,  £, Yuan.

With this, there are cracks appearing amongst central banks around the world, as to how long they can reasonably continue with their extreme monetary policy settings. Interest rate markets have been asking the question and at least some central bankers have now given a bit of ground –notably the US Federal Reserve last week. Yes, there is still the debate about how much of the ramp-up in headline CPI inflation, globally,is transitory. However, there is also the fundamental question of whether underlying inflation is firm enough, and labour markets recovered enough, to recommend policy rates to start to normalise, whatever that means. It’s a different question, with more important implications.

Source: BNZ Markets Outlook

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