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Source: ONE News -
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Today's Consumers Price Index figures confirm that the inflation bogey is not yet a burning concern for the New Zealand economy.
At 0.3% for the second quarter and 1.8% for the year, inflation remains comfortably near the middle of the Reserve Bank's target band of 1-3%t.
But it is just as well for the governor Allan Bollard that inflation is behaving itself....and that there were no nasty surprises on the up side today.
Because any spike in underlying price and wage inflation now could create added headaches for the bank going into 2011.
This is because there is a - well flagged - jump in inflation on its way for New Zealand.
Higher energy costs from the Emissions Trading Scheme along with an increase in GST later this year are expected to push inflation well over 5% in coming quarters.
However the spike is not expected (or supposed) to last or flow through into real day to day price and wage expectations.
So the Reserve Bank will - in a roundabout sort of a way - turn a blind eye to this one-off spike and allow inflation to run outside its mandated target band for a few months.
But it won't be a comfortable process for the Bank to go through, as it can't be absolutely certain that the government charges won't cause greater underlying inflation.
If it does push up underlying inflation, the Bank will have to be far more aggressive - given its inflation mandate - in the way it approaches hiking the OCR next year.
Not something anyone wants to see given the still fragile nature of the recovery.
And that's why the RBNZ has been pretty active in warning firms not to take the opportunity to hike prices on the back of the GST increase later this year.
Employment issues
The employment side of things may prove more complicated for the Reserve Bank.
At moment, with unemployment at 6% there is unlikely to be huge pressure on wages to rise. However as the economy recovers that could easily become more of an issue.
Already some recruitment firms are talking of skill shortages, while economists at the BNZ seem to think that New Zealand at 6% unemployment has already used up much of its employment slack.
All in all you can see that getting inflation expectations right is going to be a tricky balancing act for the Reserve Bank over the next year.
While underlying inflation might be steady now at 1.8% there is still not a lot of leeway if things go wrong.
Now all this talk about inflation may be galling for some, when most of the western world seems more threatened by deflationary pressures at the moment.
Interest rates, for example, aren't likely to rise anytime soon in the US.
And no doubt there will be plenty more debate in New Zealand following the release of today's figures as to how much of a threat future inflation really is in New Zealand.
With today's 0.3% quarterly figure on the weak side, critics of the recent interest rate hike will feel their case has now been bolstered.
The poor retail and housing data out this week will have also backed up their argument that interest rate hikes are not yet needed.
Despite that, my feeling is that Bollard - with an eye to the coming inflation spike - will err on the side of caution and still hike the bench mark interest rate at the next mark - July 29.
But it will be only 25 basis points and a pause in the rate cycle after that could well be on the cards.
