21 Aug 2013

Lift in inflation expectations surprises

7:14 am on 21 August 2013

The Reserve Bank's survey of inflation expectations showed a surprising lift in inflation expectations for the next two years, which could feed into a rise in interest rates.

The September quarterly survey of businesses shows inflation expectations for the year ahead rose to 1.9%, from 1.5%.

And two-year-ahead expectations lifted to 2.4% from 2.1%, well above the annual inflation rate of 0.7% recorded in the June quarter.

ASB senior economist Jane Turner said the two-year series had been easing during the past few years, and the lift was quite sharp.

"There are a number of developments over recent months that have contributed to this, in particular the recent decline in the New Zealand dollar is expected to lift tradeable inflation pressures over the next few years," Ms Turner said.

"But in addition to this, we've seen consistent evidence of improving domestic demand conditions in New Zealand, and that also generates increased confidence in the economic outlook but also inflation pressures."

Retailers had been aggressively discounting for the past year but there was tentative evidence some of that discounting had been pared back, as demand had improved, she said.

"If they pull in those margins, it will translate to stronger inflation pressure in the retail sector but also through the wider economy."