Inflationary expectations are becoming unhinged, with businesses’ expectations of inflation two years out running at their highest level in more than 30 years (since 1991)!
Why does this matter?
Well inflationary expectations from businesses, are an important signal for what they think will happen and how they are going to behave in any contractual negotiations over pricing with customers. In short – these expectations can translate into real outcomes, if businesses engrain them into how they operate!
The persistence of inflation over the long-term in New Zealand isn’t a fait accompli just yet and the last thing we want is businesses to act like it is. The transient global and supply chain factors that have pushed up prices will eventually ease – or we will innovate our way to lessen the burden.
So what we don’t want here and now is for businesses to act like a high inflationary environment is going to persist over the longer-term. If they do this, then it is going to be that much harder to rein in inflation.
Businesses have a role to play here. Particularly larger businesses, and those with stronger balance sheets or fatter margins that aren’t being existentially squeezed.
These businesses can show leadership. They can publicly take on the role of a “responsible corporate” and tell their customers, and the media, that they are taking some of these pressures on the chin. They can tell the country that they are making a stand of being deliberately conservative in their pricing and have chosen not to engrain rapid price increases in longer-term contracts.
Far-fetched?
No not really, the funny thing is these types of movements can have a snowball effect. An initial trickle of businesses getting on the bandwagon can lead to a torrent.
Businesses that lead the way can garner favour with customers, and may actually win long-term business out of what they are doing.
What’s more, if businesses don’t begin to get real, and don’t lower their future expectations of inflation, then the Reserve Bank won’t hesitate to act aggressively with interest rates to stamp these “deviant pricing thoughts” out of businesses’ heads. So really taking a little on the chin now, is not only responsible and could win favour with customers, but it also wards off the risk of future interest rate costs heading higher than they need to be.
Recent data on inflationary expectations is available from the Reserve Bank’s website (an update released on 12 May 2022 is available here).