Surprise! Surprise!

You've seen that the Reserve Bank has unexpectedly cut interest rates by 0.25% and has at least one more 0.25% cut in the pipeline.

For me, the most striking thing in the Monetary Policy Statement was this graph.

No matter how you slice it, it's now apparent that core inflation is, at best, systematically in the bottom half of the RBNZ's target 1-3% band, or, arguably, dropping out the bottom. And the trend, if anything, is that core inflation is still falling.

There are some who will argue that this is, in part, the RBNZ's own doing, with its interest rate increases in 2014 which (with hindsight) proved too tight a setting of monetary policy and hence subdued inflation more than desirably. Personally, I'm rather more inclined to another explanation, which is that our economy (and others) have changed in some still not fully understood way, so that the amount of inflation you get for any given degree of strength in the economy is less than it used to be (a "flattening of the Phillips curve", in the jargon).

Bernard Hickey of interest.co.nz asked Governor Wheeler a very good question at the post-Statement press conference, along the general lines that perhaps there have been structural changes in the global economy - technology? better supply chains? - that have made pursuit of 2% inflation targets a waste of space (I'm paraphrasing).

The Governor agreed that there had certainly been changes along those lines that could well be depressing inflation. But he said that no central bank had yet decided to flag away inflation targetting, and no central bank had lowered its target inflation rate. He also said that the traditional "output gap" analysis - if the economy is going gangbusters (a positive output gap) you'd expect higher inflation - is still very useful, and that the Bank isn't abandoning the traditional framework.

We'll see. For now, though, I'm rather attracted to the idea that inflation in the developed world has moved structurally lower. Throw in the additional fact that most of the major developed economies have their monetary policies set on super-easy, and you can readily get to the point of believing that there's actually no sensible setting of local monetary policy that will get inflation back up to 2%. In that light I'm not surprised that the Bank has now pushed  inflation being back at 2% out to March 2018.