The visible hand in economics

Does the Bank see petrol prices as anti-inflationary?

Posted on: October 23, 2008

According to their recent official cash rate decision they might:

The reduction in domestic spending will be partly offset by the depreciation of the New Zealand dollar over the past few months, falling oil prices (emphasis added) and the recent loosening of fiscal policy

Now I have no problem with this view – hell we have discussed the ambiguous nature of oil prices on inflation before (here, here, and here).  However, our conclusion was that the net impact would be zero – not the negative relationship the Bank is implying here.

This is consistent with the RBNZ’s strong focus on the “demand” side of the economy ahead of any “supply” side effects – and indicates that any sharp increase in retail sales (given recent declines in oil prices) could put the Bank back into pausing mode.

I think this is actually a fairly substantial point – it tells us that as well as watching the labour market numbers, we need to watch retail numbers in order to get a handle on future movements by the Bank.

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4 Responses to "Does the Bank see petrol prices as anti-inflationary?"

I thought the conclusion was that the net impact on interest rates was zero – falling petrol prices certainly have an impact on inflation, but the relationship is less supply-side inflation now, more demand-side inflation later.

“I thought the conclusion was that the net impact on interest rates was zero”

Which must imply that the the impact of petrol prices on medium term inflation is zero.

[…] Another factor is “inflation” – petrol prices have fallen drastically, implying that annual growth in the CPI will also fall. However, this isn’t a decline in inflation, which is the trend rate of growth in the price level. Cutting on the basis that the headline figure for inflation will collapse is a risky strategy – as it ignores the fact that once the decline in petrol prices falls out of the data future increases in the CPI will be greater, as it implies that domestic demand will be higher than it would have been otherwise. In fact, recently the Bank appears to be implying that the more petrol prices falls, the greater actual inflationary pressures are (here). […]

[…] Petrol price collapse (which might be seen as inflationary), […]

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