Inflation has risen to 7.8%, according to Massey forecasting tool

Wednesday, 11 January 2023

The consumer price index (CPI) records changes in the price of hundreds of goods and services. (First published January 20, 2022)

Annual inflation has risen to a new high of just over 7.8% in the new year, according to a high-tech but not yet fully mature inflation-tracking tool developed by Massey University academics.

If the estimate proves accurate, that would suggest inflation was getting a second wind and could put pressure on the Reserve Bank to further tough up its current cycle of interest rate hikes.

Massey University economics professor Christoph Schumacher, who co-developed the tool, said it would be overstating it to say he had a high level of confidence official inflation had risen above the 7.2% figure last recorded by Stats NZ for the September quarter.

But he said his gut feeling was that the 7.8% forecast was “not far off”.

Inflation at that level would not be surprising given that the latest data showed wage rises outpacing inflation, he said.

* 2022: A record year for consumer spending

Infometrics believes inflation is not turning around fast enough to dissuade the Reserve Bank from hiking the official cash rate to 5% next month.

* Global food prices in 2022 hit record high amid drought, war

The inflation-tracking tool, which Massey describes as “state of the art”, receives information that includes eftpos transaction volumes, freight movements at Auckland and Tauranga’s ports and on KiwiRail, and Trade Me activity.

It then uses a machine-learning algorithm to extrapolate out the likely movement in the broader Consumer Price Index based on the previous correlations in the two sets of data over the past 12 years.

The tool was developed amid concerns that official quarterly inflation updates from Stats NZ are published too infrequently and with too much of a lag to be of maximum help setting monetary policy.

Massey plans to incorporate live pricing data from supermarkets into its model later this year.

“I am confident the overall concept works. It will get better every month,” Schumacker said of the inflation tracker.

Stats NZ will release its official estimate of December quarter inflation on January 25 and the Reserve Bank will release its next monetary policy statement on February 22, when it is expected to increase the official cash rate (OCR) from its current level of 4.25%.

Infometrics principal economist Brad Olsen said the first major scheduled piece of economic news for the year would come on Thursday week, when Stats NZ will release its estimate of how much food prices rose in December.

ACT Party leader David Seymour believes the Reserve Bank should reconvene its monetary policy committee earlier than scheduled despite the lack of big economic surprises over the holiday period.

Massey’s inflation-tracker estimate reflected the concern Infometrics had that inflation was still running hot, he said.

Late in December some businesses had told Infometrics they were starting to see a bit of a turnaround in sales, but they were still saying that they were having to raise prices, he said.

“We've heard from no-one who has been talking about a change in their pricing mentality. That doesn't give us a great feeling about inflation.

“I don't think things are starting to turn fast enough for the Reserve Bank to be comfortable that it's got inflation back under control.”

Given that, it was “odds-on” the Reserve Bank would raise the OCR by 75 basis points to 5% next month, Olsen said.

Economists around the world are keeping watch for signs inflation might come off the boil in time to dissuade central banks from tipping economies into recession, or alternatively that price rises could get fresh legs.

But Capital Economics’ London-based chief economist Neil Shearing said financial markets had been relatively quiet over the holiday period.

Developments included the dismantling of China’s Covid restrictions and a corresponding surge in infections that was producing “large negative shocks to both supply and demand”, and a collapse in natural gas prices in Europe, which were now lower than prior to Russia’s invasion of Ukraine, he said.

Olsen and ACT Party leader David Seymour both agreed there did not appear to have been many major economic surprises over the Christmas and New Year period.

But Seymour repeated his call for the Reserve Bank to reconvene its monetary policy committee earlier than planned in January, so it could update people on its thinking.

That was justified by the bank’s own “bombshell” monetary policy statement in November, after which governor Adrian Orr agreed it was deliberately engineering what he forecast would be a shallow recession, Seymour said.

Seymour said the bank’s message was “you’re all stuffed, you are going to have a recession; by the way see you in three months”.

“They themselves have given the rationale for meeting again more quickly.”

A Reserve Bank spokesperson said that as of Wednesday its monetary policy committee had not elected to hold an unscheduled meeting.

“Unscheduled adjustments to the OCR may occur at … times in response to unexpected or sudden developments.

“To date this has occurred only twice – the first time following the September 11, 2001, attacks on the World Trade Centre in New York and more recently in response to the Covid 19 crisis,” he said.

Olsen said he saw Seymour’s “political point” and agreed that more frequent inflation-reporting could be helpful, but said he saw no point in an unscheduled Reserve Bank meeting given the lack of fresh economic information.

It would cause “angst” in the market and do more harm that good, he said. “I genuinely don’t know what they would look at.”