Survey shows inflation staying high

There will be little cheer for mortgage holders in the latest information on inflation.

It shows prices getting high and staying high and borrowers bearing the brunt of bringing them back down.

Remarks like these have become common, but the latest lot are different.

They come from a survey of 33 business leaders and professional forecasters which was commissioned by the Reserve Bank.

As such they reflect the beliefs of people in business more than economists in an office.

They expected inflation would still be a high 5.08% one year from now and 3.62% two years from now.

Although this number is down from the current 7.2%, it is still way too high for the Reserve Bank's supposed target of 1% to 3% and is expected to spur still more combative activity from the bank, according to the survey sample.  .

Its monetary managers would push the Official Cash Rate (OCR) up by 65 points this quarter, to reach 4.15%, and then carry on, propelling the OCR still higher to 4.67% by the end of September next year, the survey believed.

Hard pressed workers would respond by seeking higher wages, with a projected growth of 5.34% in the coming year. While that would marginally beat inflation in nominal terms, it would fall far behind it after tax was deducted.

The survey thought GDP growth would be muted, at 1.27% in the coming year, while unemployment would rise from 3.3% to 3.92% in a year.

The survey had some positive news but the public will have to be patient. Mean five-years-ahead inflationary expectations were 2.33%, well inside the Reserve Bank's range. But even this figure was higher than it was in the last survey three months ago.

The senior economist at Westpac, Satish Ranchhod said the strong increase in prices expected by the survey sample would no doubt be a worrying sign for the central bank.

“Interest rates have been on the rise for over a year now.” he said.

“However, underlying inflation is not showing signs of easing. And now, with inflation expectations pushing higher, there’s a risk that the inflation cycle could be even more protracted.”

Ranchhod said he expected a 75 point rise in the OCR later this month.

Mark Smith at ASB was also concerned.

“If this survey is an accurate representation of wage and price behaviour, it spells trouble for the RBNZ,” he said.

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