Inflation could be 'moon-bound' with nearly all surveyed businesses expecting higher costs, ANZ says

The latest research from ANZ has found inflation could be "moon-bound", with a net 96 percent of surveyed firms expecting high costs over the coming months.

The ANZ Business Outlook survey for March released this week reports inflation pressures are expected to continue to lift "with the commodity price impact of Russia's invasion of Ukraine giving pressures fresh impetus".

"Inflation expectations rose 0.3 percentage pts to a new record high of 5.5 percent and pricing intentions took yet another meaningful leg higher to a net 81 percent," the report says.

"Indeed, the latter suggests CPI inflation is moon-bound. A remarkable net 96 percent of firms report that they expect higher costs. Can’t get much more broad-based inflation pressure than that."

The report says the news gets "even worse" if the businesses surveyed are split into those who responded before March 21 (when a reminder email was sent out) and afterwards.

Among the 29 percent who responded afterwards, a net 99 percent expected higher costs over the next three months and "1-year-ahead inflation expectations were startling 5.9 percent, nearly three times the [Reserve Bank's] 2 percent target midpoint".

StatsNZ revealed in January that annual price inflation jumped 5.9 percent between the December 2020 quarter and December 2021. That was the largest annual jump since the June 1990 quarter, when it hit 7.6 percent. ANZ has since predicted inflation could hit 7.4 percent in the second quarter of this year.

In Parliament on Wednesday, National's Nicola Willis asked Finance Minister Grant Robertson if he thought middle-income earners should receive tax relief given ANZ's suggestion that inflation is moon-bound. The National Party has proposed raising income tax thresholds.

Robertson replied by noting that most inflation pressures are coming from offshore, including supply chain issues and the jump in oil prices off the back of Russia's invasion of Ukraine.

"On this side of the House, we have determined that the best response for us at the moment is the fuel excise duty cut that we've made; to make public transport half price; to continue to invest in strong public services like health, education, and housing, while supporting those on low and middle incomes, including through the family tax credit changes."

"It could well be a rough ride," ANZ says.
"It could well be a rough ride," ANZ says. Photo credit: Getty Images.

According to the ANZ outlook, all sectors surveyed - retail, manufacturing, agriculture, construction and services - expect to see a negative change in their margins over the next three months. All report higher pricing intentions, but their cost expectations are higher.

"The strongest wage pressure is in agriculture, followed by construction," the report says.

"There’s little evidence of a wage-price spiral here, insofar as most firms are anticipating similar wage lifts next year as those delivered in the past 12 months, with the biggest anticipated increase in wage settlements being in the services sector (around 1 percent higher than in the last 12 months). The retail sector is alone in intending to give smaller wage increases."

Other indicators monitored by ANZ have bounced back, but not significantly. Business confidence has slightly improved, rising from a net balance of -51.8 in February to -41.9. These small recoveries may be because "the worst fears about the impact of Omicron have waned".

"There’s a wariness evident across the ANZ Business Outlook survey that doesn’t seem likely to be entirely due to the current Omicron outbreak," the report says.

"Overall, the themes are consistent with the themes outlined in our recent forecast update and OCR call change: The housing market and the outlook for speculative construction is weakening quite rapidly; Households are facing increasing headwinds and budgetary pressures, and are reducing their discretionary spending;  Firms’ margins are getting squeezed;  Inflation pressures are extremely broad-based and still intensifying."

ANZ continues to forecast 50 basis point OCR hikes in April and May.

"It could well be a rough ride, but maintaining medium-term price stability is the best contribution monetary policy can make to New Zealand’s big-picture economic prospects from this very difficult starting point."