Inflation expectations have gone 'ballistic', ANZ says

Friday, 29 October 2021

Econ Talks - inflation spikes to 4.9 per cent in September quarter.

Inflation expectations have gone “ballistic” with consumers now expecting annual inflation to run above 6 per cent over the next two years, ANZ’s monthly survey of consumer confidence has found.

The bank put that down in part to media coverage in the wake of inflation rising faster than expected to 4.9 per cent in the September quarter.

ANZ chief economist Sharon Zollner said the Reserve Bank tended to ignore the public’s expectations of what inflation would be when setting interest rates.

But she noted “households have had it all over everyone else in picking inflation recently”.

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Superannuitants took the brunt of inflation in the September quarter, Stats NZ calculates.

If consumers expected inflation to rise, they would also want higher wages to compensate, she said.

That could make their fears of higher inflation to some extent a self-fulfilling prophecy.

Consumers surveyed by ANZ expected on average that annual inflation would be 6.2 per cent over each of the next two years, significantly higher than last month when they forecast that rate would be 5.1 per cent.

“Households have been pretty smart about inflation in the past 18 months, and what they think matters hugely for both firms’ pricing power and wage negotiations,” Zollner said.

Statistics NZ said on Friday that superannuitants bore the brunt of the inflation burden in the September quarter, with beneficiaries the least impacted out of 13 different household types, because of their different spending patterns.

ANZ’s survey showed its consumer confidence index slipped 7 points in October to 98 points, well under the index’s 120 point long-term average.

The bank also reported a small drop in its main measure of business confidence earlier this week.

But Crown accounts published by the Treasury on Friday suggested consumer spending had been holding up during the earlier period of the three months to the end of September, with GST receipts $184m higher than forecast during the quarter.

“Auckland is hanging in there – consumer confidence actually lifted slightly over the month and is higher than the North Island excluding Auckland and Wellington,” Zollner said.

“That makes some sense: Auckland is looking forward to easing restrictions, whereas the rest of the North Island knows Covid is on the way.”