Inflation’s a funny thing. It sort of creeps up on you unnoticed. So I thought I’d have a look at where it’s been since before the Global Financial Crisis hit in 2008, where people think it’s going from here, and how that’s going to affect interest rates and investment decisions for 2011.
The latest report from Statistics New Zealand showed the CPI rose 4% for the year to the December 2010. Obviously a major factor was the GST increase which showed up in the December quarter increase of 2.3%.
And no wonder when I went to buy petrol for the car the other day I seemed my petrol tank had grown. Petrol prices increased 6.8% in the quarter due to the increase in the price of crude oil, higher excise duty, and of course GST. And I guess an egg burger at the pie cart costs more because for the year food prices rose 4.6% with milk egg and cheese prices up 12.6% to their highest recorded level.
So let’s look at the trend over the last few years. The annual increase in the CPI for the years ended December in 2006, 2007, 2008 and 2009 were 2.6%, 3.2%, 3.4% and 2.0% respectively compared with 4% this time.
It’s interesting to compare residential mortgage rates with the annual CPI increase. For example in September 2008 just before the Global Financial Crisis, the average bank residential floating rate was around 10% and the annual CPI increase 5.1%. By June 2009 the average bank residential floating rate was 6.4% and the annual CPI increase had dropped to 1.9%.
So how’s this latest spike going to affect interest rates? The Westpac economists view is the result is “in line with the RBNZ's headline inflation forecast (where they estimated that ‘underlying’ inflation, excluding the direct effects of the GST hike and other government charges was 1.4%) it will have done nothing to sway the RBNZ from its plan to gradually increase interest rates from Q3 this year.”
BNZ economist Tony Alexander has a similar view. His key forecast is there will be a tightening through to mid 2012 with the next rate rise possible in June but he says this is highly conditional on the economy’s progress.
From all the information I can find the general opinion is so far – bearing mind most of New Zealand is just returning from holiday - the New Zealand economy is taking longer than expected to recover and any rise in the Official Cash Rate is unlikely before September. And if anything a rise can be expected later rather than earlier.
Investment in 2011
But whatever the timing there’s a definite feeling out there that 2011 is going to better than 2010 with consumer confidence up in the ANZ Roy Morgan Survey. In fact economic commentator Roger Kerr’s view is that all the economic data releases over the first 3 months of 2011 will prove to be better than expected. He says “there will be a realization that +3% growth does bring inflation risks later on and thus the super-loose monetary policy settings with the OCR at 3.00% are just not appropriate for the economic outlook.”
“By the time the RBNZ have the hard economic evidence they need to remove the monetary stimulus, it will already be too late and thus force them to lift official rates rapidly from March/April onwards. In addition to the RBNZ’s expected U-turn on the NZ economy, the improved global economy in 2011, led by the US and Asia, will also be aiding a stronger NZ economic growth outlook.”
Tower Investments CEO Sam Stubbs, speaking at Tower's inaugural quarterly briefing last month, said inflation would be one of the dominant themes for the investment world in 2011. He said inflation was already beginning to rise around the world and this was being priced into the market.
In his view the developed world will have to keep printing money to fulfill promised stimulatory packages. And there were three main ways countries could dig themselves out of debt; by growing out of it, restructuring or inflation. "We think there will be a combination of restructuring and inflation.” he said
Despite predictions of interest rate rises he believed residential mortgage rates would remain relatively stable. He said banks remained committed to mortgage lending as their lowest risk form of lending. Accordingly owning or buying a house is a good idea.
“Most people buy a house by taking out a mortgage. Having a mortgage on a house with inflation around the corner is not a bad thing” he said.
Businesses have been hurting due to the lending practices banks have been taking – to some extent forced upon them by regulation – and by the demise of other lenders like the finance companies. There will be many opportunities for cashed up buyers – or those that have access to finance outside the potential target – to buy or invest in successful businesses that are carrying too much debt.
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