The Reserve Bank of New Zealand published an Analytical Note assessing how different measures of firms’ price setting behaviour explain and forecast domestic or non tradables inflation. The research finds that modelled measures based on recent inflation outcomes generally perform better than survey based measures of inflation expectations, and that firms appear to adjust prices more in response to recent inflation than to expected future inflation. Measures that are more sensitive to recent inflation data were found to be better forecasters of non tradables inflation than those less sensitive to recent inflation. However, performance differences across the measures considered were relatively small, leading the authors to conclude it is best to monitor a range of measures because price setting behaviour can change over time. The findings are intended to support the Monetary Policy Committee’s judgements on the inflation outlook and settings for the Official Cash Rate, particularly following episodes of unusually high or low inflation that affect how quickly inflation returns to the 2% target midpoint within the 1% to 3% target range.
Reserve Bank of New Zealand 2025-08-03
Reserve Bank of New Zealand research finds modelled price setting measures outperform surveys in forecasting non tradables inflation
The Reserve Bank of New Zealand's Analytical Note reveals that measures of firms' price setting behavior based on recent inflation outcomes are more effective in forecasting non-tradables inflation than survey-based expectations, though differences are minor. The findings aim to aid the Monetary Policy Committee in assessing inflation outlooks and Official Cash Rate settings, especially after significant inflation deviations.