Business & Investing: Inflation worldwide is causing a rethink of economic policy, with markets gloom exacerbated by the strong ripple effects of the war in Ukraine
As consumers know all too well right now, the cost of living continues to escalate rapidly.
And this week we get to see the stark reality of how inflation has suddenly become everyone’s hot button issue, both for consumers and businesses, with this Thursday’s much anticipated release of the consumer price index for the March quarter set to reveal the true extent of our current inflation problem.
No doubt the Reserve Bank had a preview of the figure together with its own internal modelling before releasing its monetary policy review last week and clearly didn’t like what it saw, hence the surprise double hike which few were expecting. (A poll conducted by Bloomberg before the announcement showed just 25 percent of economists surveyed expected a double hike.)
So brace for a figure that, even a year ago, would have seemed almost out of the question.
Kiwibank chief economist Jarrod Kerr says he’s expecting quarterly CPI to come in around 7.4 percent which would make it one of the highest rates in decades.
The last reading in December had annual inflation sitting at 5.9 percent, but significant hikes in petrol, food and other living costs since then, fuelled by the war in Ukraine, has pushed inflation to near record levels.
But Kerr believes we could be nearing what he terms ‘peak inflation’, a debate that is currently raging in many western economies right now between those who believe this is as about as bad as it gets and others who say this is just the start of a more prolonged inflationary spiral.
“We know from previous experience how to get on top of inflation. What we don’t know is how to deal with deflation” he said.
A deflationary environment is characterised by falling prices, which leads to reduced production and ultimately increasing unemployment.
In its statement last week the Reserve Bank said that moving the OCR to a more neutral stance sooner would reduce the risks of rising inflation expectations, saying a larger move now will provide more policy flexibility given the uncertain global economic environment currently.
Kerr agrees it’s about managing inflationary expectations.
“Front loading now until they can get to a neutral setting will mean a slower grind higher from there."
Canada’s central bank also hiked its cash rate by half a percentage point last week and now expectations are for the US Federal Reserve to do the same when it meets in early May.
US inflation surges to levels last seen during the Reagan era
US Inflation leapt to a 40-year high of 8.5 percent in March and showed little sign of quickly reversing, adding a new hurdle for the world’s largest economy and complicating the Fed’s efforts to tame soaring prices.
Monthly CPI jumped 1.2 percent in March, driven by higher gasoline, food and housing costs. It was the largest monthly gain since Hurricane Katrina in 2005.
Much like here, the rise in the cost of living in the US has been hitting new highs. The rate of inflation in the past year surged to 8.5 percent in March, up from 7.9 percent. The last time inflation topped 8 percent was in January 1982, when Ronald Reagan was president.
But in a sign inflation might be close to peaking, it was the smallest increase in six months in the so-called ‘core rate’ of inflation that strips out food and energy. It rose just 0.3 percent last month.
The Fed views the core rate as a more accurate measure of inflationary trends, despite the fact most American consumers still spend a significant share of their budget on fuel and meals.
Share markets ease as oil prices climb once again. Gold price flirts with $2000/oz
The NZX50 fell 1.5 percent last week, finishing the shortened trading week at 11,891, about the same level it closed at a month ago on March 16.
After 15 trading weeks so far this year only four have ended with a positive close as investors become increasingly skittish about the impact higher costs will have on profitability levels.
Next month’s reporting season for companies with a March balance date, including market heavyweights Mainfreight, F&P Healthcare and Ryman, will be the first opportunity investors get to see the impact rising inflation is having on profits, particularly since the onset of the war in Ukraine.
Across the Tasman, Australia’s ASX200 advanced 1 percent benefiting from higher commodity prices, including an 8.6 percent increase in Brent crude oil futures which closed at US$111.50/barrel. Shares in Aussie oil giant Woodside Petroleum are up more than 40 percent year to date.
Gold prices also continued to edge higher, gaining 1.3 percent last week to US$1972/oz and jumped a further 1 percent on Asian markets yesterday to US$1992/oz. A break above US$2000/oz this week and a retest of the March highs for gold now look increasingly likely.
In the US, the benchmark S&P500 index slumped 2.1 percent for the week to 4,393, while the tech heavy Nasdaq fell 3 percent to 13,893 adding to last week’s fall of 3.6 percent.
The prospect of higher interest rates continues to weigh on tech stock valuations and not even the prospect of a takeover bid by Elon Musk for Twitter was able to buoy sentiment with its shares falling 2.5 percent for the week, well below Musk’s all-cash takeover bid of US$54.20 a share.
Bond markets test new highs as global outlook darkens
US treasuries eased with the benchmark 10-year note gaining a further 0.12 percentage points for the week to 2.83 percent as traders increased their bets on an aggressive series of rate hikes by the US Federal Reserve. On March 7 the 10-year note traded at 1.69 percent highlighting the extent of its rise over the past six weeks in response to more hawkish comments from Fed officials.
The IMF is expected to downgrade its forecasts for most countries this week as finance ministers and central bankers convene at the spring meetings of the fund and the World Bank to discuss how to respond to the darkening economic outlook.
Policymakers must work out how to address rapidly rising prices and the dangers of raising interest rates when debt levels are already high.
Kristalina Georgieva, IMF managing director, last week called the war in Ukraine a “massive setback” for the global economy, while Eswar Prasad, a senior fellow at the Washington based Brookings Institute told the FT the US Federal Reserve was facing a potentially volatile scenario.
“The Fed is at real risk of losing control of the inflation narrative and could be forced to tighten even more aggressively than it has signalled, raising the risk of a marked slowdown in growth in 2023” he said.
The NZ dollar fell 1.3 percent for the week to 67.59 US cents, despite the surprise double hike in the OCR, as traders responded to the RBNZ’s decision to leave its year-end terminal rate unchanged at 3.25 percent.
Cryptocurrencies were also weaker in response to the negative tone on markets, with Bitcoin falling 4.2 percent for the week to US$40,358 and Ether easing 4.6 percent to US$3056.
China GDP growth beats forecasts but lockdowns weigh on outlook
China’s economy expanded at a quicker pace than expected in the first quarter, though official data revealed a recent contraction in consumer activity as sweeping Covid-19 lockdowns clouded the country’s growth outlook.
Gross domestic product rose 4.8 percent compared with the same period a year earlier, after expanding 4 percent in the final three months of 2021. On a quarter-on-quarter basis, GDP grew 1.3 percent.
Analysts had projected gains of 4.4 percent year-on-year and 0.6 percent quarter-on-quarter as Covid outbreaks have increased, leading authorities to largely seal off Shanghai, the country’s main financial hub.
Retail sales, a gauge of consumer spending, fell 3.5 percent in March — their first year-on-year fall since July 2020 and worse than a projected 1.6 percent decline — as authorities hardened restrictions to counter the country’s worst coronavirus outbreak in more than two years.
Adding to concerns regarding its economic outlook, the official unemployment rate rose to 5.8 percent, its highest level since May 2020.
The data will increase pressure on President Xi Jinping’s government, which has reaffirmed its commitment to a zero-Covid policy despite the mounting costs and disruption across the country’s biggest cities.
Coming up this week….
Thursday
- Consumer Price Index (March qtr) – Stats NZ
- New vehicle registrations (March) – Stats NZ
Friday
- Credit Conditions – RBNZ
- Seeka AGM
