Inflation expectations

By Eric Crampton 30/01/2013

Bill Kaye-Blake notes the macroeconomic consequences of the delayed Christchurch rebuild, and wonders whether we consequently should have more stimulatory monetary policy:

First, I could see the logic in the plan. Austerity for reasons of national economic policy — reducing the debt, placating overseas money markets — while getting some Keynesian intervention through Christchurch. Secondly, it didn’t work. It became clear in 2011 that it wasn’t working. Nevertheless, the Government stuck with the plan longer than I think they should have, and longer than the state of the economy warranted.

He puts up graphs showing RBNZ estimates have been optimistic relative to experienced reality for the last several quarters, that core CPI has been low, and that unemployment remains high.

I’m happy to agree with Bill that the stalled rebuild had macro consequences, as well as the general awfulness for folks stuck in very poor housing. But let’s have a look at some inflation expectations.

I’m here drawing from iPredict’s quarterly markets on inflation rates. The table below has the risk of inflation outcomes above 3% and below 1%, based on the price of shares in the relevant markets.

Quarter Probability inflation
less than 1%
Median expected
Probability inflation
greater than 3%
March 2013 84% Less than 1%
June 2013 23% Between 1% and 2%
September 2013 34% Between 1% and 2%
December 2013 15% Between 1% and 2%
March 2014 18% Between 1% and 2%

Inflation risks look pretty balanced over the medium term.

The markets are also expecting no change in the OCR in any quarter through the end of the forecasting horizon. The greatest likelihood of any change is a 21% chance of an 25bp increase in December 2013, though the markets also are pegging pretty stagnant GDP growth rates and an unemployment rate unlikely to drop below 6% before September quarter 2013.

You could maybe justify a small cut to the OCR on that risks currently should be weighted towards breaching the top rather than the bottom of the bound, and on that the median expected rate converges to a shade below 2% rather than a shade above it. But it’s hard to see much case for that RBNZ has been grievously tight when they’re targeting a medium term.

0 Responses to “Inflation expectations”

  • Hey Eric – Thanks for pulling out the expectations from iPredict — I haven’t put in the time to figure out their website. To me, the easiest explanation for what they show is that the RBNZ has firmly anchored expectations in the 1% to 3% band. Even so, nearly 40% of expectations are outside the band in March 2014 (if I’m reading this correctly), and 30% outside the band in Dec 2013.

    Even more worrying is expectations versus the macro forecast: no change in OCR, even with stagnant GDP and high-ish unemployment for at least the next six months. That is, forecasters believe that the economy will continue to be blah AND the the RBNZ won’t do anything about it. If we really do believe that the OCR has an effect on the macroeconomy, shouldn’t we try to use it?