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Inflation risks behaviour changes that make it harder to contain – economist




Challenging people’s beliefs that high inflation will persist makes the Reserve Bank’s job of keeping inflation below 3% all the more difficult, says SBA Chief Economist Nick Tuffley .
Photo: RNZ

Economists worry that people are getting too used to high inflation, making it even more difficult for the Reserve Bank to get a grip on it.

This comes as US inflation shows signs of slowing and more than expected, falling from just over 8% to 7.7% in October.

In New Zealand, it’s a different story where inflation is expected to come down much more slowly.

ASB chief economist Nick Tuffley said there was a growing risk that high inflation would change people’s behavior unnecessarily.

“If we all think inflation is going to be slightly higher in the future than it has been, then we’re going to be pushing a lot harder for a bigger pay rise as an employee. employer, we’re going to be more understanding of those arguments, more likely to give those big pay raises,” he said.

Challenging people’s beliefs that high inflation would persist made the Reserve Bank’s job of keeping inflation below 3% all the more difficult, Tuffley said.

“All of these types of behavioral changes fuel inflation and make it much harder for the Reserve Bank to lean against.”

Meanwhile, Westpac economists expect inflationary pressures to hit home as more people reprice mortgages at higher rates.

Its latest economic outlook, released today, said pressure on prices and wages meant the chances of a soft landing for New Zealand’s economy were getting slimmer.

Westpac’s senior economist, Satish Ranchhod, said many borrowers have yet to feel the impact of rising interest rates.

“A lot of people are heeding these high inflation numbers, but rather than going straight through their spending, they’re trying to push for bigger wage increases,” he said.

“It’s a normal thing for any household, but when we see it happening across the economy, it can really bring this inflation story to life, which means inflation stays higher for longer. long time.”

Ranchhod said he would expect consumer spending and demand for workers to decline over the next year.

Westpac’s acting chief economist, Michael Gordon, said continued high inflation meant the official exchange rate (OCR) was set to rise further to a high of 5% in 2023.

“While the Reserve Bank has been more successful than most in recognizing the need for action, the scale of the inflation problem means it has always found itself on its back.”

Monetary policy has always been slow to have its full effect on the economy, Gordon said.

Economists expect the Reserve Bank to keep the pressure on – ASB and Westpac expect a sharp 75 basis point rise in the OCR later in November.