Are inflation expectations still anchored?

The Reserve Bank surveys households and businesses for their inflation expectations. As you’d expect, expectations have shifted recently with the rise in the CPI.

But households and businesses have parted ways in the long term outlook. Households think inflation five years from now will still be at 5%. That is up 2% from a year ago.

Businesses disagree. They think inflation five years from now will be 2.3%, and 2.1% in ten years. Businesses have shifted their view by only 0.3% and 0.1% respectively in the last 12 months for those 5- and 10-year timeframes. This is good.

Households Inflation Expectations M13
Dec 2020Dec 2021
1 year ahead – median2.2%4.0%+1.8%
1 year ahead – mean2.8%4.5%+1.7%
5 years ahead – median3.0%5.0%+2.0%
5 years ahead – mean4.3%5.6%+1.3%
Businesses Annual CPI Growth Expectations M14
Dec 2020Dec 2021
1 year ahead1.73%4.4%+2.7%
2 years ahead1.89%3.27%+1.4%
5 years ahead2.03%2.3%+0.3%
10 years ahead2.01%2.12%+0.1%

New Zealand emissions are falling

After peaking in 2006, net emissions of greenhouse gases from this country have fallen materially.

Since 2006:

  • Net emissions including agriculture are down 6.7%.
  • Net emissions including agriculture per capita are down 22.1%.

The gap between these two figures is population growth. Between 2006 and 2019, the population increased 20% from 4.2 million to 5.0 million. Total emissions is probably the relevant value for Paris 2030 but per capita is the more relevant value to the 2050 target of net zero emissions.

Gross emissions are responsible for 106% of the change in net emissions since 2006. Agriculture emissions peaked in 2014 and have fallen 1% since then.

Source: Greenhouse gas inventory 1990-2019, Ministry for the Environment

I suppose you think it is just a coincidence that New Zealand’s emissions began falling almost exactly when the Emissions Trading Scheme was launched?

Yes, it probably is a coincidence. The GFC landed in 2008 and after an early price spike the ETS did not deliver a carbon price in double figures until 2016. It is possible the fact there was an emissions price and the promise of higher future prices made a difference. But who knows?

The fall in net emissions after 2013, during a period of economic growth, is the more promising part of the trend line.

So there has been impressive progress on emissions.

There the good news ends. To reduce emissions to net zero by 2050 will require per capita emissions to fall at a higher rate, 48% faster than between 2006-2019. That is a big number, made bigger by the fact that the 22% reduction since 2006 was the low-hanging fruit.

It only gets more difficult from here.