HAHAHA, good point. I had that discussion at work just before. We’ll make it December 2010 dollar terms – just so I don’t have the perverse incentive to try and create hyperinflation if it looks like I’m going to lose 😉

Wasn’t mentioning faith based superfluous as soon as you said economic forecaster 😉

I see what you are saying – hell that was exactly how I felt before the GFC. Since then I’ve stepped back a bit, and I don’t feel as concerned about their performance.

What got me nervous was the sharp increases in the adjusted LCI, for me that is the closest we have to a real inflation expectations measure. But that is still only one-year ahead – and without more information I’m a bit cautious about just “expecting” policy failure, especially when the policy is being determined by economists 😉

Fair point on the early 1990s, however with a number of those misses NZ was facing a positive price level shock – so measured inflation exaggerated underlying inflationary pressure. Having a single year spike because of an unanticipated lift in petrol prices, or an unanticipated slump in the currency, does not violate their mandate.

I agree with you (as I have said before) that I am uncomfortable with them seemingly targeting the top of the target band – however, they are still targeting a level of inflation and their performance has still been credible. We would both agree that targeting a higher level of inflation is a bad thing – but at least they are still targeting a level and aiming to hit it.

“But perhaps, as an evidence based person, and given the past record, I should put up $100 that the December 2015 CPI is more than 15% above the December 2010 CPI, and see how much you would be willing to bet against it. ”

Sounds good – so that is annual price level growth of 2.8% between December 2010 and 2015. I still think that we will be on the weak side of the economic cycle in Dec 2010 (update disregard this, I for some reason thought we were in the start of 2010 now …) , but as the Bank says that history doesn’t matter this is irrelevant – so I’m in.

If we exclude any changes to GST during that period I’m down for a $100 bet where I take less than 15% and you take more than 15%.

Update If you are keen for the bet, just email me or comment here – then I will make a blog post to make it official 😉

The 1992 Policy Target agreement was for 0- 2% inflation.
End of year inflation rates for 1992, 1993, 1994, 1995, 1996 were 1.3, 1.4, 2.8, 2.9. 2.6.
This means the the average was 2.2, and the target was missed 3 out of five years.

The 1996 policy target agreement was 0- 3% inflation.
The end of year inflation rates for 1997 – 2002 were 0.8, 0.4, 0.5, 4.0, 1.8, 2.7. The average was 1.7, the target was only missed one year.
Mind you this includes a short sharp recession accentuated by poor monetary policy.

The 2002 policy target agreement was 1 – 3% inflation
The end of year inflation rates for 2003 – 2010 were 1.6, 2.7. 3.2. 2.6. 3.2. 3.4. 2.0, 4.0.
The average is 2.8 and the target is missed 4 out 8 years. In the 5 years to 2008, the average was 3.016 percent, which must be stretching the boundaries of 1-3 percent in the medium term; in the 7 years to December 2010 the average is 3.01.

So we have a pattern of frequently missing the target on an annual basis (8 out of 19 years overall; 7 out of 13 in 1992- 1996, 2002 – 2010) ; having average inflation exceed the target zone for two non-overlapping five year stretches; and creeping increases in the target zone. An uncharitable person would even say the Government selected a governor prepared to sign off on a watered down policy target agreement to make it appear as if they achieved their mandate even though the policy target agreement is probably not consistent with the Reserve Bank Act. (But who wishes to be uncharitable.)

No matter, “They have remained inside their mandate for the last two decades.”

Personally, I don’t think it is likely that the CPI will increase by more than 20% in the next five years. But perhaps, as an evidence based person, and given the past record, I should put up $100 that the December 2015 CPI is more than 15% above the December 2010 CPI , and see how much you would be willing to bet against it.

Andrew