ep 368 | Why inflation expectations are so important right now
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Why are inflation expectations so crucial right now?
On Point with Craig's Investment Partners. The information provided here is general in nature and it's not financial advice. It doesn't take into account your situation, objectives, goals or risk tolerance. All investments are subject to risks and none are guaranteed. Before you make any investment decisions, we recommend you contact an investment advisor. For more information about our services or to view the Craig's Investment Partners Financial Advice Provider Disclosure Statement, please visit our website which is craigsip.com. Welcome to On Point. I'm Mark Lister, Investment Director at Craig's Investment Partners, and I'll be talking about a range of topics including economics, portfolio strategy, investor education, and anything else that's happening out there in financial markets.
G'day team, hope you're all well. It is Reserve Bank Day today, so I wanted to talk about the most important topic for
How do inflation expectations influence consumer behavior?
for the Reserve Bank right now, because it might surprise you what they're watching most closely. We've seen a lot of economic releases over these last several weeks. We've had the CPI, the Consumer Price Index, we've had retail sales, we've had housing market data, we've had a mountain of releases. However, The most important ones of all were probably two that came out last week, and these covered inflation expectations. Now, it might sound slightly odd that what people think might happen trumps what is actually happening. out there across the economy. But right now, that is very much the case. Expectations matter because they influence behaviour, and behaviour drives outcomes. And that is especially so when it comes to inflation.
What recent surveys reveal about expert inflation expectations?
If enough people expect prices to rise, there is a risk that they will then start behaving in ways that will ensure that those prices do rise. Workers will push harder for pay rises because they're expecting their own living costs to keep going up. Businesses will lift their prices that they're charging customers because they're expecting their own costs to rise too. And consumers will start to think about bringing forward the purchases of goods if they're able to. If you know that that item you need will cost more next week and even more next month, next quarter, you will buy it today to avoid those price hikes if you can. Now when that all happens at the same time, inflation expectations can become self-fulfilling, and that is why central banks spend so much time worrying about them.
As well as keeping today's inflation under control, the Reserve Bank, remember, is also trying to convince all of us together that inflation will remain low and stable in the years ahead. And that is what it means when it talks about keeping inflation expectations anchored. It needs to win that PR battle with consumers, with businesses and with financial markets so that we all keep our behaviour in check. Now, last week, the Reserve Bank released two separate surveys that looked at this inflation expectations.
How do households' inflation expectations differ from experts' views?
The first one canvassed around 40 economists, business leaders and professional forecasters, the experts, you might say, while the other surveyed more than a thousand New Zealand households. And the good news is that the experts are still relatively relaxed. Unsurprisingly, this group has raised its collective view about where short-term inflation is going, and that's understandable. That's on the back of higher fuel prices, supply chain disruption, and so forth. But more importantly, longer-term expectations remain pretty well anchored. Five-year inflation expectations from this group of experts are sitting at around 2.2%. Now, remember that the Reserve Bank has a target range of 1% to 3%. And the midpoint of that range is 2%.
So they're pretty much aiming for two. And over the next five years, the experts think it'll hit 2.2.
What historical context shapes current inflation perceptions?
So pretty close to two, right? 10-year expectations from this group, lower again, just above 2%. So that is good news. The Reserve Bank will really take comfort in that. That will tell them that people who spend their lives living and breathing the economy and financial markets and inflation indicators, they believe that the system is working.
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Chapters
7 chapters
1
Why are inflation expectations so crucial right now?
0:00–0:56
2
How do inflation expectations influence consumer behavior?
0:56–1:44
3
What recent surveys reveal about expert inflation expectations?
1:44–3:06
4
How do households' inflation expectations differ from experts' views?
3:06–3:58
5
What historical context shapes current inflation perceptions?
3:58–4:36
6
Why is the Reserve Bank focused on inflation expectations?
4:36–5:35
7
What indicators is the Reserve Bank monitoring to manage inflation?
5:35–7:42
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