Has inflation fallen below the Bank’s target?

I’ve heard people suggesting that the RBNZ has failed its mandate on the downside, eg this tweet by Vernon Small.

If inflation is 0.6 excluding excise on fags and the RBNZ looks thru Govt charges then hasn’t it just breached 1-3% band on the downside?

Now, I don’t mean to come out to defend the Bank as they can do it fine on their own – but there are a couple of clear issues with this claim I can comment on.

Firstly, as Eric Crampton suggests, the Bank is supposed to aim for inflation outcomes that settle in this range “in the medium term” – moving outside of this range for a single quarter doesn’t imply that they’ve failed anything.

The logic here is that the relative price of goods and services may change, and “unexpected” things may happen that the Bank did not foresee.  If these things happen, then the RBNZ does not want to look backwards – it wants to tell firms and households clearly that they can expect average price growth in this range in the future.

Now, there are a number of indicators of what is expected for inflation – my favourite is the adjusted Labour Cost Index, as it comes from actual behaviour rather than arbitrary reporting by individual firms and households … so what has that been doing?

So in this sense, things look pretty good – in least in so far as the inflation mandate is being met given the current credibility and policy of the RBNZ.

But even in terms of our measures of what “has happened” with inflation, did inflation actually slip temporarily out of the Banks target band?  As I have mentioned before annual growth in the CPI is a poor measure of what “inflation” really is – we want something like the RBNZ’s dynamic factor model (here).  So what is the sectoral factor model telling us?

Now, there is some end-point bias in this (the nearer periods will change as we get more data), but it doesn’t seem to suggest that inflation feel out the bottom of the band – even with the domestic economy, labour market, and global growth all disappointing heavily.

As a result, this type of criticism of the RBNZ doesn’t seem to be warranted.