Changing dynamics in household behaviour help explain low inflation

Release date
22 November 2016

The Reserve Bank is taking account of changing household saving and spending behaviours in its inflation forecasts, Deputy Governor Geoff Bascand said in a speech to the Australia National University in Canberra this evening.

Mr Bascand said that Australasian patterns of saving and spending are proving different from other advanced economies.

Internationally, demand dynamics have changed since the global financial crisis (GFC), challenging inflation modelling and, in some cases, inflation-targeting frameworks.

Some economists suggest that we are now in an era of “secular stagnation”, with persistent low demand due to higher saving and a reduced tendency to invest, driving down the long-term real neutral interest rate. Others point to an overhang from earlier excessive debt accumulation and suggest that demand is being depressed by a lengthy period of deleveraging (reduced borrowing).

Across advanced economies, investment has been weak and national saving rates on average haven’t altered significantly since the GFC.

But a different picture emerges in Australasia, which has witnessed an uplift in saving, especially by households, and steady output growth supported by robust investment. 

“In Australasia the current outlook looks a lot like that which prevailed before the 2000s. In other advanced economies, weak investment growth, coupled with a disappointing expansion in the supply side of the economy, points to a world more consistent with lower long-term growth expectations.

“To what extent heightened household saving preferences in Australasia represent a permanent shift or a prolonged deleveraging adjustment is uncertain. Some indicators provide tentative support to the view that it represents a prolonged cyclical correction.”

Mr Bascand says the rate of growth of consumption, including the relationship between consumption and wealth, is crucial to the Reserve Bank’s assessment of business cycle dynamics and inflation prospects.  Projections of demand arising from historical estimates of consumption from wealth have been over-optimistic. Weaker spending than expected out of higher housing wealth is part of the reason why inflation has been lower than forecast.

He says taking into account the increase in household saving we have seen, the links between interest rates, output and inflation appear stable.

“Currently, we are projecting per-capita consumption growth to improve and provide an impetus to output growth. The acceleration is modest compared to the previous cycle as household saving is expected to remain positive over the forecast horizon.”

Read the speech: Changing dynamics in household behaviour: What do they mean for inflationary pressures?

Media contact
Naomi Mitchell
External Communications Adviser
Ph 09 366 2643 or 027 294 3900
Email: naomi.mitchell@rbnz.govt.nz