In a paper entitled Will we see a sustained pick-up in inflation?, Westpac senior economist, Satish Ranchhod, says that while Westpac economists concur with the Reserve Bank’s view that inflation is set for a sharp lift after the recent slump of the New Zealand dollar, it is sceptical about how enduring the resulting pick-up will be. “Changes in the exchange rate generate only a temporary lift in inflation, with the domestic prices of imported goods typically adjusting over a period
of around 12 to 18 months,” he points out.
“That’s a lot shorter than assumed in the Reserve Bank’s forecasts. In fact, the only time we’ve seen a pick-up in imported inflation that has been sustained for anything like what the Reserve Bank is projecting was in 2000-01. During that period the currency had fallen to a record low and oil prices had tripled over the previous three years, from $10 to $30 a barrel.”
Ranchhod argues that the consequence of the Kiwi’s slump will be a slightly more persistent boost to inflation than usual as retailers may seize the opportunity to rebuild thin margins.
“In recent years, tough trading conditions and the lingering strength in the NZ dollar resulted in retail margins shrinking. Now, with the NZ dollar having fallen, the domestic price of imports is set to rise. As retail prices rise in response to the increase in imported costs, we may see some retailers rebuilding margins at the same time.”
The scope though for retailers to claw back margins currently appears limited.
“Consumer confidence has fallen sharply and businesses have highlighted a limited ability to increase prices compared to average,” explains Ranchod.
In conclusion, according to Ranchod, the inflation rise on the horizon is transient. He is of the opinion that the Reserve Bank NZ will be forced to reduce the official cash rate to two per cent over the next year from 2.75 per cent.
Nerine Zoio: nerine@insideretail.co.nz
