Friday, April 22, 2022

Point of Order: Overseas forces are to blame for the surge in our living costs? But non-tradables inflation (up 6 per cent) then must be explained…

In the wake of the latest inflation figures being published today, showing the consumers price index has risen at its fastest pace in some 30 years, the burning question is whether we have a cost of living crisis.

Opposition parties (inevitably) seized on the annual 6.9 per cent CPI increase to insist prices are out of control. National Party leader Christopher Luxon says prices are a “silent thief in your pocket”.

On the other side of the political fence, the Council of Trade Unions contends that inflation is being driven by the price of property and the price of fuel.

The man who is running the economy accepts no responsibility. Finance Minister Grant Robertson says the increases in consumer prices are a “reminder of the current global economic challenges” – but he adds, almost as an afterthought, they do show the need for responsible fiscal policy in New Zealand.

Whatever the huffing and puffing politically, the hard fact is that a New Zealander who took out a 30-year mortgage a year ago fixed for a year and who is now looking to refix could find monthly payments go up a formidable 33 per cent.

While they wince at the increasing burden on their household finances, some New Zealanders may well blame the Ardern government for an economic management failure, but that’s something which the Finance Minister won’t countenance.

He argues these are challenging times for the global economy with significant increases in food and fuel prices hitting all nations.

“Inflation is at a 40-year-high of 8.5 per cent in the United States and a 30-year high of 7 per cent in the United Kingdom. Chinese ports have been shut for long periods, adding to supply chain disruptions. New Zealand cannot be immune to these challenges and the government can’t control the price of food or petrol.”

He concedes that for many families the pressure from these high prices are real, but he argues:

“We are well positioned to respond to this challenge. Unemployment at a record low, exports are up and the economy is growing and helping keep a lid on debt, which is well below those of the countries we compare ourselves with.

"This strong base means we have eased the pressure on New Zealanders. We’ve taken immediate action on fuel prices by cutting fuel excise by 25 cents a litre saving up to $17 a refill and halving public transport fares. We’ve provided significant support to families, seniors and students and the Winter Energy Payment kicks in from 1 May.

“We are also focused on how we can get to the root causes of some price increases. We are committed to taking action to boost competition in the New Zealand grocery market to ensure Kiwis get a fair price. We are also moving to reduce our dependence on oil by decarbonising our transport fleet, through initiatives like the Clean Car Discount”.

Furthermore, Robertson insists there are no silver bullets for dealing with a situation like this. The Reserve Bank has the job of managing inflation in our system (although he requires our monetary policy managers to keep unemployment in their considerations, too).

The central bank is using its tools to try to bring the CPI back into the target range of 1-3 per cent over the medium term. Most economists are now forecasting inflation to peak in the second quarter of the year and then start easing.

The government, Robertson says, is continuing to keep a careful, balanced approach to future spending.

And again he warbles a familiar tune from his favourite songbook:

“Our economic recovery is gaining momentum”.

Yes,there’s more to do ….

“.. but we’re heading in the right direction and I am focused on taking a balanced approach to invest sustainably in New Zealand’s long-term prosperity while carefully managing our spending.”

The CTU sees it slightly differently and contends the inflation data shows the need to make sure that those with the lowest incomes are protected from inflation.

Food prices rose nearly 7 per cent, led by fruit and vegetables which rose 17 per cent.

Meat rose 7.2 per cent. The price of 91 fuel rose 8.7 per cent, even after the effects of the recent cut in duty. The cost of local authority rates increased by 7.5 per cent.

The CTU’s Craig Renney says:

“These are all unavoidable costs for many New Zealanders and hit those with the lowest incomes hardest. This underscores the long running problem with low wages in New Zealand. This is why we need Fair Pay Agreements to put in a minimum floor for wage and conditions by industry – like they have in Australia where wages are constantly higher. Only by finally addressing New Zealand’s persistent low wages can we help people deal with a rising cost of living.”

It’s no surprise that Opposition politicians are putting things in a deeply contrasting perspective.

“The Finance Minister needs to face up to New Zealand’s cost of living crisis and present a plan to help get skyrocketing inflation under control, says Christopher Luxon.

“Inflation has hit a new 30-year high of 6.9 per cent. It’s a silent thief in your pocket putting Kiwis under massive pressure, and we are seeing a squeezed middle emerge.Kiwis are facing the consequences of Labour’s poor economic management, with inflation in New Zealand outpacing Australia’s and many other countries.

“Rents are up $150 a week since 2017, interest rates are rising and wages increases are barely a third of inflation.”

Kiwis are going backwards under Labour, Luxon insists, and many families are struggling to make ends meet.

He further insists this is not just an international story. The domestic ‘non-tradable’ element of inflation is the highest on record, at 6 per cent

Luxon draws attention to the Reserve Bank’s message this week that it will need help from the Government to try to get inflation under control.

But he accuses Robertson of having no plan to help tackle skyrocketing inflation.

“He must take responsibility for presenting a sensible plan to help combat inflation pressures, reducing costs, removing bottlenecks and ensuring value for taxpayers’ money.

“Instead, at a time when we need careful economic management and spending discipline, he seems intent on pushing ahead with a record $6 billion increase in annual spending in next month’s Budget,” says Luxon.

ANZ Bank economists noted that inflation had persistently surprised forecasters to the upside over the past year – both in this country and overseas.

With the global environment still highly inflationary, with global food prices surging, and with China grappling with Covid outbreaks,

“… we could feasibly still see higher headline inflation prints over the middle of this year”

More importantly, the domestic inflation pulse has continued to increase, with non-tradables (domestic) inflation at 6 per cent year-on-year and measures of core inflation far too high and heading in the wrong direction.

“The labour market is set to be a big driver of inflation over 2022, as wages start to get the memo about record-low unemployment. So if anything, this continued rise in domestic inflation pressures only reinforces the need for ongoing interest rate rises by the RBNZ.”

ANZ economists were the first major bank economists to forecast a 50 basis point lift in the Official Cash Rate, which transpired last week. They foresee another 50-pointer coming in May.

Westpac senior economist Satish Ranchhod said while the inflation figures had been “a touch softer than we expected”, the result supported Westpac economists’ expectations for a series of further rate hikes from the RBNZ over the coming months, including a 50-pointer in May.

“Inflation is expected to remain above the RBNZ’s target band through the remainder of 2022. And although much of that is due to overseas cost pressures, the domestic inflation picture has also heated up,” Ranchhod said.

“Crucially for the RBNZ, both households and businesses are expecting that inflation will remain strong for some time yet. That’s a big concern for the central bank, as if that spills over into wage and price setting decisions, the strength in inflation could be sustained for even longer. That would mean that even larger interest rate increases are needed to rein the inflation monster in. On this front, it’s notable that we’re already seeing growing upwards pressure on wage claims.

“Concerns about inflation expectations saw the RBNZ swing into action at its recent policy meeting with a 50bp increase in the cash rate. Today’s strong inflation result will have done nothing to alleviate those concerns.”

Point of Order thinks there’s a fair bit to digest in all of this, with no fruit salad to finish off with. Not with fruit prices the way they are …

Point of Order is a blog focused on politics and the economy run by veteran newspaper reporters Bob Edlin and Ian Templeton.


RRB said...

Rule #1; Governments through incompetent ministers cause inflation, in this case by borrowing and printing money and high taxes.
Luxons response is weak waffle. Why didn't he state the obvious or is it because previous National Party incompetence is guilty of the same. An opposition leader would state the required remedy not an inflationary answer.

Anonymous said...

when money goes to people (via tax cuts or benefits), they have a choice: some spend it & fuel the consumption, others save/invest it & fuel the production.
when money goes to govt, they do the only thing that people do with OPM (other people's money).