Reserve Bank of New Zealand chief economist Paul Conway has issued a stark warning that rising inflation expectations could cause price pressures to become entrenched in the economy.
Speaking less than a week after the central bank implemented its first Official Cash Rate (OCR) increase in three years, Conway emphasized that monitoring how households and businesses perceive future inflation is now a top priority for policymakers.
The chief economist’s comments underscore the delicate balance the Reserve Bank faces as it attempts to cool demand without triggering a wage-price spiral.
Conway noted that if firms begin adjusting their pricing strategies based on the belief that inflation will remain elevated, the central bank’s task of returning prices to target will become significantly more difficult and costly.
This focus on the psychology of inflation highlights the shift from purely data-driven responses to managing the broader economic narrative.
The warning comes against a backdrop of persistent global inflationary pressures.