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'I would not underestimate the challenge that humanity faces in decarbonising our livelihoods and lifestyles' By Gareth VaughanClimate Change Commission Chairman Rod Carr says he's optimistic about New Zealand's transition towards a zero carbon future despite the massive challenges we face, including from inflation.Carr spoke to interest.co.nz in an episode of the Of Interest Podcast.In the podcast he discusses the impact on inflation from moves to combat climate change, and from climate change itself, and what can be done to mitigate it. This includes so-called "fossilflation," "greenflation," and "climateflation."In a world that now has high consumer price inflation I ask Carr whether he's concerned this may slowdown efforts to combat climate change. For example, by reducing petrol excise duty and road user charges to give consumers some relief from high petrol prices while we are trying to wean ourselves off fossil fuels, does the Government risk countering measures such as clean car rebates and cash for clunkers to encourage the take-up of electric vehicles?We also discuss the big global electrification push and what this is doing to demand for key mined metals and minerals required in the green transition such as copper, lithium and cobalt.Then there's the rising number of severe weather events, and the impact this has on food product, supply and prices. "I would not underestimate the challenge that humanity faces in decarbonising our livelihoods and lifestyles. The fossil fuel technology that has been developed and deployed largely since the middle of the 19th century is incredibly powerful as a source of energy. And we have embedded that in our civilisation, in the way we earn our livings, and how we live our lives. And that transition is going to be costly. And that transition needs to be done with urgency. And the consequence is that relative prices will change. The price of high emission lifestyles will rise, and the vulnerability of high emission livelihoods will increase," Carr says."The major cause of the consumer price inflation we see today is not climate change or our response to it. The amount of pricing of carbon emissions in the global economy is modest and has only risen slightly over the last decade. The real challenge is that in our response first to the global financial crisis in 2008, and then more recently to the pandemic in 2020, the world's central banks, supported by the world's governments, have created an enormous amount of very low cost credit. And it is that abundance of low cost credit that has put pressure on the demand side of consumer pricing, while the pandemic itself has constrained supply. And that has been compounded in some product supplies, particularly in agriculture products, by the war in Ukraine. So don't over interpret climate as the driver of the current decades high levels of consumer price inflation."Carr is also a former Chairman, Deputy Governor and Acting Governor of the Reserve Bank. So what does all this mean for fiscal policy, or the Government using spending and tax policies to influence the economy, and the Reserve Bank's efforts to use monetary policy to maintain price stability and support maximum sustainable employment?Carr says he remains optimistic about the transition to a zero carbon future because there are "very real opportunities" for NZ in this transition. NZ farmers, he says, must face the challenge of showing and leading the world how to create protein and carbohydrates with year-on-year reductions in environmental impact."And that if we can understand those opportunities that make for a better, cleaner, greener and healthier society for all New Zealanders by 2050, where we reduce gross emissions from how we earn our livings and how we live our lives, we will see that as an opportunity not a threat. We will see fiscal policy as an investment not a cost, we will see the new jobs that are created as being more sustainable and less vulnerable than the old tasks which we are no longer fulfilling," says Carr."And I think that's what the optimism comes from, is from the opportunity that is real. New Zealand is not soldiering alone on this campaign. The world recognises the challenge. Other countries are already seeing and seizing the opportunities. We see it in the way in which the UK has developed offshore wind which it now sells to the world, we see it in Norway that has developed some of the most advanced infrastructure for supporting electrification which it now sells to the world, we see it in China in its advances in the solar panel technology where it is now the world's largest global manufacturer of solar arrays. So there are opportunities here to be  not as I said at the bleeding edge, but now that the die is cast , seeing and seizing the opportunities that must be developed to create the more sustainable, low emissions future within the next 30 years."
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Too much inventory risks pullbacks Kia ora,Welcome to Wednesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.I'm David Chaston and this is the International edition from Interest.co.nz.Today we lead with news supply-chain stress in threatening the global economy in a fundamental way now. And weaker American consumer sentiment isn't helping.The rise in American inventories is starting to become concerning, although much of it is just caused by price rises. Still even if retail inventories were only up +1.7% in May from April, they are up a sharp +17% from May 2021. Wholesale inventories are where the real problems are, up +25% year-on-year. Congestion in shipping, rail and warehouse supply lines haven't really eased. The prospect of an inventory-correction has to be rising. There could be US$250 bln in excess stock in their supply chains, US$150 bln in wholesale channels, US$100 bln in retail channels. That represents about 1% of US economic activity, so any pullback would be noticeable even if not huge. World-wide it is a very much larger problem and that is where the real risk lies.The US merchandise trade deficit for May came in less than for April although not by much. But at least it was their lowest in five months with exports rising +22% year-on-year. As we have noted before, the overall trade deficit amounts to only about -4% of US GDP, again very manageable in the intermediate term at least.The weekly Redbook indicator as an early view on American retail sales shows them tracking little-changed with no real sign of any slowdown on this front.But the Richmond Fed factory survey does, confirming what the Dallas Fed survey indicated yesterday - that the top is off new order levels and future prospects don't look as bright in June.And the widely-watch Conference Board survey of consumer sentiment in June has turned negative too, near a ten year low. You would expect this negativity to show up in retail sales activity soon. If not, the mood turn is entirely political, not economic.Will the US Fed change its tightening course? Michael Burry thinks a retail bullwhip is coming and they will. But overnight senior central bank speakers in both the US and the ECB doubled-down on their inflation-fighting purpose.In China, senior officials are exhorting farmers to bring in a good grain harvest, an unusual move that probabaly indicates some concerns about food security in light of Russia's invasion of Ukraine.In Germany, GfK Consumer Climate Indicator declined to a fresh record low even if it wasn't quite as bad as expected. It been really negative for the past four months.In Europe generally, we should note that Turkey has now consented to both Finland and Sweden joining NATO.In Australia, their Federal Government has racked up AU$892 bln in bond debt - and growing. (For reference, the NZ Government has AU$168 bln gross outstanding.) At the rate they need to issue new debt, it will exceed AU$1 tln in the next few years. They now have a very serious interest rate risk. Plus, just given the quantum they have at risk, the market appetite for more may be constrained - meaning buyers may get hard to find. The head of their debt management office has been out explaining his expected predicament.The UST 10yr
'I would not underestimate the challenge that humanity faces in decarbonising our livelihoods and lifestyles' By Gareth VaughanClimate Change Commission Chairman Rod Carr says he's optimistic about New Zealand's transition towards a zero carbon future despite the massive challenges we face, including from inflation.Carr spoke to interest.co.nz in an episode of the Of Interest Podcast.In the podcast he discusses the impact on inflation from moves to combat climate change, and from climate change itself, and what can be done to mitigate it. This includes so-called "fossilflation," "greenflation," and "climateflation."In a world that now has high consumer price inflation I ask Carr whether he's concerned this may slowdown efforts to combat climate change. For example, by reducing petrol excise duty and road user charges to give consumers some relief from high petrol prices while we are trying to wean ourselves off fossil fuels, does the Government risk countering measures such as clean car rebates and cash for clunkers to encourage the take-up of electric vehicles?We also discuss the big global electrification push and what this is doing to demand for key mined metals and minerals required in the green transition such as copper, lithium and cobalt.Then there's the rising number of severe weather events, and the impact this has on food product, supply and prices. "I would not underestimate the challenge that humanity faces in decarbonising our livelihoods and lifestyles. The fossil fuel technology that has been developed and deployed largely since the middle of the 19th century is incredibly powerful as a source of energy. And we have embedded that in our civilisation, in the way we earn our livings, and how we live our lives. And that transition is going to be costly. And that transition needs to be done with urgency. And the consequence is that relative prices will change. The price of high emission lifestyles will rise, and the vulnerability of high emission livelihoods will increase," Carr says."The major cause of the consumer price inflation we see today is not climate change or our response to it. The amount of pricing of carbon emissions in the global economy is modest and has only risen slightly over the last decade. The real challenge is that in our response first to the global financial crisis in 2008, and then more recently to the pandemic in 2020, the world's central banks, supported by the world's governments, have created an enormous amount of very low cost credit. And it is that abundance of low cost credit that has put pressure on the demand side of consumer pricing, while the pandemic itself has constrained supply. And that has been compounded in some product supplies, particularly in agriculture products, by the war in Ukraine. So don't over interpret climate as the driver of the current decades high levels of consumer price inflation."Carr is also a former Chairman, Deputy Governor and Acting Governor of the Reserve Bank. So what does all this mean for fiscal policy, or the Government using spending and tax policies to influence the economy, and the Reserve Bank's efforts to use monetary policy to maintain price stability and support maximum sustainable employment?Carr says he remains optimistic about the transition to a zero carbon future because there are "very real opportunities" for NZ in this transition. NZ farmers, he says, must face the challenge of showing and leading the world how to create protein and carbohydrates with year-on-year reductions in environmental impact."And that if we can understand those opportunities that make for a better, cleaner, greener and healthier society for all New Zealanders by 2050, where we reduce gross emissions from how we earn our livings and how we live our lives, we will see that as an opportunity not a threat. We will see fiscal policy as an investment not a cost, we will see the new jobs that are created as being more sustainable and less vulnerable than the old tasks which we are no longer fulfilling," says Carr."And I think that's what the optimism comes from, is from the opportunity that is real. New Zealand is not soldiering alone on this campaign. The world recognises the challenge. Other countries are already seeing and seizing the opportunities. We see it in the way in which the UK has developed offshore wind which it now sells to the world, we see it in Norway that has developed some of the most advanced infrastructure for supporting electrification which it now sells to the world, we see it in China in its advances in the solar panel technology where it is now the world's largest global manufacturer of solar arrays. So there are opportunities here to be  not as I said at the bleeding edge, but now that the die is cast , seeing and seizing the opportunities that must be developed to create the more sustainable, low emissions future within the next 30 years."
In the economic arm wrestle, the US outpaces China Kia ora,Welcome to Tuesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.I'm David Chaston and this is the International edition from Interest.co.nz.Today we lead with news American economic data is generally more positive while Chinese economic data is generally less positive.First, American durable goods orders for May came in better than expected with a +12% rise from year-ago levels. As good, orders for capital goods also rose +12% on the same basis reflecting that board rooms are still investing strongly. For both measures, the month-on-month gains also beat forecasts.Also positive, pending home sales broke a six-month skid with a slight rise of +0.7% in May from April. There was a noticeable surge in the Northeast region. Year-on-year they are down however -13.6%.Not positive however is the Dallas Fed factory survey for June with a sharpish deceleration recorded. Of particular concern is the quick fall-off in new orders.In Japan, new data shows that the Bank of Japan now owns half of all bonds there, a relentless buildup as they continue their easy money policies to bring back inflation.Meanwhile, Russia has defaulted on its foreign debt. It can't pay largely as a result of sanctions inhibiting its ability to shift funds. It's their first default of foreign debt in 100 years. But during Russia’s financial crisis and ruble collapse of 1998, then president Boris Yeltsin’s government defaulted on $US40 bln of its local debt.The struggles of China's industrial companies continued into May. In the month, profits were -6.5% lower than the same month a year ago, and it is little comfort that decrease was less than for April. That takes their year-to-date gains back to just +1.0%. The whole situation is actually much grimmer; manufacturing profits are almost -18% lower and utility companies -6% lower. The overall results are only restrained by profit surges in coal and other mining companies.The Chinese central bank injected a total ¥100 bln (NZ$23 bln) into their banking system yesterday, by a seven-day reverse repurchase at a rate 2.1%, to ease pressure from rising cash demand toward the end of the first half of the year. They started pumping more cash into the financial system on Friday. Demand usually surges towards the end of the quarter, when commercial banks also have to shore up cash positions for an administrative quarterly health check by the central bank. But the size of this may suggest more is at play this time.Taiwanese consumer sentiment fell in June, and the slip from May was sharp as it has been for a couple of months now, and it is now at its lowest since November 2009, lower than during the 2020 pandemicIn Australia, they released 2021 census data today and that shows some important trends in their demographics. For example the millennial demographic now equals the boomer population (both now at 21.5% of their population), and soon to outnumber it. And it also shows that more than half of their population is first or second generation immigrant.The UST 10yr yield starts today up +6 bps from this time yesterday at 3.20%. The price of gold is at US$1823/oz in New York and down -US$3 from this time yesterday.And oil prices are +US$3/bbl higher from this time Saturday at just over US$109/bbl in the US, while the international Brent price is now just over US$111.50/bbl.The Kiwi dollar will open today at just over 63 USc. Against the Australian dollar we are unchanged at just under 91 AUc. Against the euro we are nearly -½c lower at 59.5 euro cents. That all means our TWI-5 starts today at just on 70.8 and down -30 bps.The bitcoin price has moved lower from this time yesterday and is now at US$20,699 and down -2.4%. Volatility over the past 24 hours has been moderate at +/- 2.4%.You can find links
G7 and BRICS square off in great power rivalries Kia ora,Welcome to Monday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.I'm David Chaston and this is the International edition from Interest.co.nz.Today we lead with news there are meetings underway by two powerful economic groupings today - the G7 and the BRICS countries.The G7 has about twice the economic activity of the BRICS countries, and the BRICS are in a bit of a rut at present, which is unusual for them. The BRICS are meeting 'virtually' and India seems to be a weak link, also meeting on the sidelines with the G7. It is noticeable that the G7 is active while the BRICS are defensive.The G7 are about to roll out an extended set of sanctions on the invading Russians, including around gold transfers, insurance, and the oil price. A number of BRICS members (like China) could be boxed in by these moves. The G7 leaders morph into NATO leaders in a few days later.The annual inflation rate in Japan was at +2.5% in May, unchanged from April's 7½-year high but in line with market expectations. This was also their 9th straight month of rising consumer prices, with food inflation hitting its highest in over 7 years, now topping +4%. The Bank of Japan has shown no signs of changing course from its ultra-easy money policies designed to raise inflation, but some sort of change must be getting closer.Meanwhile, very hot temperatures are causing concern over how to keep the electricity system from suffering blackouts, especially in the Tokyo area.In China, the sluggish economy is really putting the squeeze on job seekers. Their jobless rate for 16-24 year olds is now more than 18%, far above the high general jobless rate of almost 6%, which is also rising. (The equivalent NZ levels are 10.2% and 3.2%; for the US they are 10.4% and 3.6%.)Keep an eye on flooding in the vast southern Pearl River system. It has been worse than prior years and isn't over yet. Officials are calling the situation 'grim', but things do seem to have eased somewhat over the past day or so. But new flood warnings are now in place for the northern Yellow River system, also likely to be serious. And in other parts of the country, including around Shanghai, excessive heat seems to be a big issue too.Singaporean industrial production took off in May, rising much faster than anyone expected, especially after the dour prospects that were reported in April. The May recovery was broad-based.Separately, the early PMI readings for the US are out, and they suggest that factory activity is slowing now, although still expanding modestly. The same is true of their services sector, although that expansion is a little stronger. But not so hot is that new order levels are now lower than previously, the first contraction in new orders since July 2020.In its latest updated review, the US Fed released the results of its annual bank stress tests, which showed that banks continue to have strong capital levels, enough in the regulator's judgment to allow them to continue lending to households and businesses even in a severe recession.Sales of new American single-family houses in May were at an annual rate of 696,000. This is almost +11% above the revised April level and c
The pressure is piling on Kia ora,Welcome to Thursday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.I'm David Chaston and this is the International edition from Interest.co.nz.Today we lead with news pandemics, war and now floods are compounding pressures on the global economy.In the US, Fed Chairman Powell is giving testimony to Congress today and tomorrow, and today acknowledged that a soft landing for the giant American economy will be "challenging" and he also acknowledged that a recession is a real possibility there. That dose of realism has put a huge damper on financial markets today, but Wall Street is actually up, presumably on the basis that his comments on the outlook weren't worse.American mortgage applications rose again last week, a second successive weekly gain after a long period of declines. They also reported that the average 30 year mortgage rate is almost touching 6% there. It was just 3% at the beginning of 2022.In more positive news the US retail Redbook index shook off its prior week slowdown to return to its 'normal' strong recent year-on-year gain, well above what can be accounted for in inflation.There was a US Treasury bond auctions earlier today. The 20yr one was very well supported and came in with a median yield of 3.41% compared to 3.22% at the prior event a month ago.Canada reported May consumer price inflation earlier today at 7.7% and well above the 7.4% expected which in turn was above the 6.8% they reported in April. Fuel and food drove their sharp rises. This level is a 40 year high for them. Recall the US CPI is rose +8.6% in May, so Canada's impact is less than its southern neighbour.In China, their southern manufacturing hub in Guangdong raised its flood warning to the highest level due to the worst rains in decades in the Pearl River basin, spurring more evacuations and threatening further supply chain disruptions in an economy reeling from Covid-related lockdowns.And pressure, already extreme, is still rising on the Chinese property development sector. Sales have been very weak, with most of their large listed companies reporting they are only achieving less than 30% of their sales targets, and that is even after more than 200 cities have rolled out policy measures to support the struggling housing market. Nothing authorities are doing there is helping yet.That is having a direct impact on commodity prices, like copper and iron ore.In the EU, consumer sentiment is in the toilet and back near its early pandemic record low. Inflation's bite and the invasion to their East isn't making them feel good at all. Russia is now deliberately bombing grain terminals and infrastructure, completely insensitive to the food crisis it will worsen.And Europe has been told to prepare for the upcoming winter without Russian gas supply.The UK also reported their CPI inflation for May and it rose +9.1% there from a year ago (on the same basis other countries report - they have some weird local versions that are lower.) This was a fresh 40 year high too.The UST 10yr yield starts t
Lowe with 'don't go there' warning Kia ora,Welcome to Wednesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.I'm David Chaston and this is the International edition from Interest.co.nz.Today we lead with news the RBA governor has set some specific limits to where pay rises shouldn't go - to avoid monetary policy consequences.But first up today, the dairy auction brought slightly lower overall prices, down -1.3% in USD. But our lower currency turned that into a +0.9% rise from the prior event in NZD. In a reverse of what the derivatives market signaled, WMP prices dipped a little while SMP prices rose. The big mover however was the Cheddar cheese price which dived -9%. Volumes offered and sold were modest in the big scheme of these auctions. Nothing in today's result is by itself going to change farm gate payout prices but todays slip in prices is the sixth in the past seven events and since mid-March when this slide started, overall prices have fallen -9%. However, from the start of the 2021/22 season in August, prices are up +21%.In the US, analyst talking heads are out in force warning of recession. But financial markets are ignoring those.Meanwhile, the Chicago Fed National Activity Index fell to an eight-month low of +0.01 in May from April. Production-related indicators dipped sharply, while the contribution of the personal consumption and housing category fell as well. But jobs, sales, and new orders all rose on that same basis.American existing home sales activity continues its slide, recording sales at the annualised rate of 5.4 mln units in May, a heady drop from the 6.5 mln rate in January. From a year ago, that is an -8.6% retreat. It is the modestly-priced end of the market that is falling fastest, so the median price is getting skewed to more expensive houses and is up almost +15% in a year, with the median breaking above US$400,000 for the first time ever (NZ$630,000).North of the border, Canadian retail sales beat estimates in April and are now +9.2% higher than a year ago. Much of that may be inflation's impact however. But not all, so there is 'real' growth in volume terms.In China, it is the rainy season and flooding is back. It is hard to know whether it is worse this year of not, but it is extensive - just as it has been in many previous years. It certainly looks bad.Hong Kong inflation is failing to fire as demand stays very weak. It rose just +1.2% in May when a +1.6% rise was expected.We've noted it before, but the iron ore price continues to waken. In fact it is now at its lowest point on the year as Chinese stimulus demand just isn't eventuating. A good dose of over-optimism is being unwound.Also falling is the price of wheat and that is despite the ongoing export issues from the Black Sea. Coordinated international efforts are having an impact to reduce the impact of that supply, despite Russia's best efforts to choke off Ukrainian sources.In Australia, their central banks has been out explicitly warning of the consequences of excessive pay hikes. Anything over +3.5% is a problem for them they say and have warned regular pay rises of 4% to 5% risks entrenching higher inflation and bringing tougher monetary policy measures. (These warnings were in comments after the speech, not in the speech itself.)The UST 10yr yield has started the week in New York at 3.31% with a +8 bps rise. The price of gold ended yesterday at US$1834/oz and down -US$2.And oil prices are little-changed from this time yesterday to just over US$109/bbl in the US, while the international Brent price is now just over US$112.50/bb
NZ to be the world's first, largest green hydrogen producer? Kia ora,Welcome to Tuesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.I'm David Chaston and this is the International edition from Interest.co.nz.Today we lead with news New Zealand's ambitions to be a green hydrogen superpower are making real progress.But first up we should note that today is a national holiday in the US, "Juneteenth", commemorating the end of slavery, an end that started in Texas in 1865. (Until last year, it had only been a regional holiday.)Meanwhile, Chinese authorities reviewed their Prime Loan rates yesterday, and left them unchanged. In late May, their Premier released a 33-point rescue package to avoid an economic contraction in Q2-2022. But rate hikes by global central banks make it difficult for them to ease monetary policy to boost a weak domestic economy. However, analysts expect rate cuts in the second half of 2022 anyway.The impact of that package of stimulus measures hasn't kicked in yet. One consequence may be that with car sales struggling there, the lithium price is wavering. A sudden new rush in supply seems to have overwhelmed demand and a price correction is expected soon.And the Chinese price of iron ore is still sinking. And that isn't helping the share price of Aussie miners.This weakness is also showing up in Chinese consumer sentiment. The latest data released officially is for April and that showed their survey reporting a very sharp drop in confidence from a positive +13 in March to -13 in April. In a record that goes back to 1991, we have never seen a plunge like this in the official survey. Kudos to them for actually releasing such survey data that shows a vast leakage in confidence in the Middle Kingdom.After a surprise dip in April, Taiwanese export orders bounced back to +US$55 bln and +6.0% higher than a year ago. Orders from American and ASEAN customers were very strong. They were very weak from China and have been all year, a traditional source of strength.Annual producer price inflation in Germany surged to almost +34% in May from the same month a year ago, breaking a new record peak for a 6th straight month and fractional higher than in April or market forecasts. The figures reflect the effects of the Ukraine war so they are not really a surprise.In key progress for Southland, Southern Green Hydrogen, a joint venture between Contact Energy and Meridian, has announced that Western Australia's two largest miners would enter final negotiations to develop what could be the world’s largest green hydrogen plant with a reported cost of about NZ$5 bln.The UST 10yr yield has started the week unchanged at 3.23%. The price of gold ended yesterday at US$1836/oz and down -US$4.And oil prices are little-changed from this time yesterday to just over US$108.50/bbl in the US, while the international Brent price is now just over US$112/bbl.The Kiwi dollar will open today at just on 63.2 USc and +20 bps firmer than this time yesterday. Against the Australian dollar we holding 91.1 AUc. Against the euro we are also holding at 60.2 euro cents. That all means our TWI-5 starts today at just under 71.3, a gain solely due to the retreating greenback.The bitcoin price has moved sideways from this time yesterday and is now at US$19,866 and up +2.4%. Volatility over the past 24 hours has been very high again at +/- 4.2%.You can find links to the articles mentioned today in our show notes.And get more news affecting the economy in New Zealand from interest.co.nz.Kia ora. I'm David Chaston and we’ll do this again tomorrow.
A weekend meltdown Kia ora,Welcome to Monday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.I'm David Chaston and this is the International edition from Interest.co.nz.Today we lead with news nowhere is the change of economic mood sharper than in crypto markets.The selloff in those markets has deepened over the weekend, and the bitcoin has now fallen below US$20,000 for the first time since December 2020. In New Zealand dollars, it is threatening NZ$30,000. That means it has lost three quarters of its "value" since its peak in November 2021. Engine-room companies in the crypto machine are laying off staff.The cryptocurrency industry was built on swagger, enthusiasm and optimism. All three are in short supply these days as these losses and layoffs mount.Meanwhile, American factory output slipped slightly in May from April, but remained up +4.8% from a year ago, in data released today. It was the first slip in four months and the second in eight months. Overall industrial output rose in May from April because of output from 'mining' and 'utilities'. That meant overall American industrial output was +5.8% higher than year-ago levels even though capacity expanded only +0.8%. Still, the small monthly slip does feed into the idea that the US economy's expansion is slowing down.Canadian producer prices rose a heady +15% in May from a year ago, and the rise in May from April ran at a rate above that.The Bank of Japan left its key short-term interest rate unchanged at -0.1% and that for 10-year bond yields around 0% during its June meeting, by an 8-1 vote, as widely expected.But over the past three weeks, central banks around the Western world have changed direction faster away from easy-money and supporting economic activity, to focusing on fighting inflation. You could argue that the new 'cause' is a result of the prior one, but hindsight judgment is cheap. Either way, there will be an economic price to pay, one that was always ahead of us. This new resolve just means it is now front-and-center and will need to be worked through. Do democracies have the resilience to tolerate the pain involved? We have gotten so used to pain-free public policy moves (ones that kick the can), that it is hard to be optimistic.Are we heading for a recession in the major global economies? Many CEOs think we are. Will that just give firebrand autocrats ammunition? Hopefully not, but it is a big risk.It looks like central banks are in a rush to get control of inflation before the consequences of slowing or even contracting economic activity takes hold. It's a race they may not win. Certainly the effort will have some tough consequences for emerging markets, many of which could end up collaterally damaged.Bond markets apparently saw this coming. Since January 2021, eighteen months ago, a global bond index of government and corporate debt paper has now fallen more than -20%. That is a relentless, longish term slippage. But the fight against inflation probably means this is just the start of a severe repricing of bonds, one that will take much more off their values. Bond investments are not 'conservative' in times when we are in a fight with inflation.Volatility is high (although not extreme) while 'fear' is extreme.It may be the end of high commodity prices too. We should also note that the copper price looks like it is about to fall out of the high range it has occupied for the past 18 months. And aluminium may not be far behind it. Tin and nickel are showing the same brittleness. And the carbon price, which raced higher in New Zealand and Europe until February has languished in both markets since.<p
Grant Spencer on why inflation is a problem and where it's going By Gareth VaughanBy late 2020 it was clear central bank and government monetary policy and fiscal policy responses to the Covid-19 pandemic had prevented a major economic downturn, and thus the Reserve Bank should've been looking to move monetary policy to a neutral rather than super easy setting, says Grant Spencer.Spencer, Adjunct Professor at Victoria University's School of Economics and Finance, is also a former Reserve Bank Deputy Governor, and was Acting Governor for six months up to his departure from the central bank in March 2018.Spencer spoke to interest.co.nz about inflation in the second episode of the Of Interest Podcast, where we delve into big issues and new developments in the economic and financial worlds.New Zealand's March quarter Consumers Price Index (CPI) inflation came in at 6.9%, the highest it has been since 1990, and well above the Reserve Bank's 1% to 3% target range. CPI inflation is even higher in other parts of the world, reaching 9% in the United Kingdom, 8.6% in the United States, 8.1% in the Eurozone, and Australia's last reading of 5.1% is expected to rise.Inflation, Spencer says, is always driven by persistent excess demand."And in this situation over the past two-and-a-half years we've had persistent excess demand resulting from an adverse supply shock and expansionary demand policies, in particular monetary policy and fiscal policy."By about September-October 2020 Spencer says it was apparent the emergency Reserve Bank and government policies had been successful in preventing the high unemployment and "drastic economic downturn" people had feared was coming in early 2020."I think it was around September-October 2020 when bond rates, interest rates, that had been falling, started to move up again. And that was in response to emerging economic indicators both here and internationally, which were saying the out-turn for real activity in the global economy is not going to be as bad as we thought, unemployment's not going to be as bad as we thought. "After that Spencer says the Reserve Bank should've been thinking about moving the Official Cash Rate (OCR) back gradually towards a more neutral position rather than waiting until October 2021 to increase the OCR from its record low of 0.25%, where it had been reduced to in March 2020."Different countries had different sets of indicators. But I think that shape of the trend in bond rates was generalised across the major markets, it wasn't just New Zealand. So that's when the information started to turn," Spencer says."The key is the interpretation of that so-called inflation, price increases. Is this a temporary shock, supply side blip, or is it something that policy should respond to with a generalised firming of policy? And that's always the nature of the discussion. And it's very easy to be biased in one direction and just sit pat until you've got a convincing case that overall core inflation, or underlying inflation, is moving therefore we need to move.""It's difficult for policymakers to turn policy because as soon as you turn policy the markets will expect that you're going to continue to tighten. And the whole shape of the interest rate curve will change and you can have a significant effect on things just by that decision to start to make one increase rather than being on an easing mode," says Spencer."That's why they're nervous about shifting from an easing to tightening cycle until they can see the whites of the eyes of inflation. But that's also the challenge, because as it has turned out they really should've been tightening earlier."He says the Reserve Bank should've started shifting the OCR back towards a neutral setting sooner than October last year, but won't give a specific time when he thinks this should've started."They should've been moving back to neutral. The default should be seen as neutral, not as super easy," Spencer says.The neutral OCR rate is the level where it's deemed to be neither stimulating nor constraining economic activity. The Reserve Bank currently considers the neutral rate to be about 2%. That's where it's now at, after a 50 basis points increase on May 25. It was at 0.25% as recently as October last year. Spencer says the neutral OCR may be higher than 2%.The record low OCR wasn't the only aspect to easy monetary policy. Between March 2020 and July 2021 the Reserve Bank bought $53.5 billion worth of NZ government bonds and local government bonds on the secondary market off banks in its first foray into quantitative easing. This was aimed at suppressing interest rates."You know if you've got super easy policy you should be moving back towards neutral if you think that things are starting to change, and you shouldn't be just focused on one of the dual mandate objectives," Spencer says.The Reserve Bank's <a href="https
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