Economists and business writers are sending us dire warnings about the inflationary outlook for the coming year. They are mostly likely correct. After creating the biggest asset bubble in decades by lowering interest rates, ostensibly to stimulate the economy – and making assets particularly cheap – the Reserve Bank is now hiking interest rates at a rate of knots, intending to control rampant inflation. None of this makes any sense to me; the bank caused the inflation that they are now trying to control. Am I missing something here?
But scratch a little deeper, and all is not quite so straightforward. The Reserve Bank approach, one-dimensional as it is, only works in situations where people have too much money and want to spend it. ‘Too much money chasing too few goods’ is the stock definition of inflation. But the current situation suggests that this time things are not quite so simple…and, in my opinion, the Reserve Bank has got it completely wrong by adopting the current, very simplistic approach to controlling inflation.
Inflationary pressures are affecting most countries, but the reasons are not all the same. The global situation has been affected by supply chain issues, the Ukraine war and the hangover from the pandemic. New Zealand is certainly affected by those things, and the government happily tries to blame our inflation on global issues, conveniently outside of their control. But we are not much affected by the war in Ukraine, for example, as most of our grain supplies come from Australia. Yet we still have very high inflation. So what is going on?
Being an agricultural country, we produce our own food. And yes, we do get to eat some of it, particularly those items with a relatively short shelf life. But thanks to the awful La Nina weather pattern, we have had some dreadful weather in the last year, from devastating floods in Nelson in August right up to last weekend where 1500 orange trees were wiped out in Gisborne. This still falls into the category of ‘too much money chasing too few goods’, because many of our food staples just become more expensive. But it is not just a question of people having so much money that they don’t know what to do with it. It is more to do with having to pay more to keep our standard of living where it was. To afford oranges, they might have to forgo meat. That was not what Adrian Orr meant when he told people to close their wallets.
Things that are easily grown in greenhouses return to normal prices within weeks or months of bad weather events, but oranges only crop once a year… so our local growers are going to struggle, and prices will increase as a result of reduced supply.
Now think about eggs. Yes, there is an element of government policy in the egg shortage, which has driven some producers out of the industry, but there is more to it than that. My understanding is that the law changes only affect caged eggs, whereas supermarkets have now indicated that they will soon stop selling colony eggs: barn eggs, to you and me. In a country like New Zealand with a supermarket duopoly that calls all the shots, consumers are powerless. I bitterly disapprove of the supermarkets trying to control the industry like this, but they can. The result, in the short term at least, is very expensive eggs – but that is only ‘too much money chasing too few goods’ if you really can’t see a way to live without eggs.
The cost of supplies to supermarkets has increased by nearly 11% in the last month. This isn’t too much money chasing any commodity. It really amounts to trying to avoid living on bread and water. Is this what Adrian Orr wants?
Why are fuel prices still so high when the price of crude oil has dropped back to normal levels? We never bought Russian oil, yet the price of fuel is still over 50c per litre more than it was a year or so ago. Is it because, with the closure of Marsden Point, our fuel stocks are now precariously unpredictable?
Speaking of Marsden Point, it used to supply a lot of carbon dioxide to the soft drink and alcohol industries, not to mention dry ice for transporting chilled food. So if the price of your beer or tonic water goes up, it is not price gouging by the producers. It is the fault of the vandals who closed Marsden Point…and the producers are warning that they are having trouble getting food grade CO2 at all…at any price.
There are other issues. Building materials have been in heavy demand for reasons previously discussed, and price hikes seem to continue. The pandemic seems to have reduced the global workforce, as many people decided never to return to work. This means that businesses constantly face restraints in supplying their products – whatever they are – to customers. Wanting to go out to lunch with friends in Wellington over Christmas, we had real trouble finding anywhere open on January 5th. Our usual haunt was closed for another week. The reason? Staffing issues. We found a place and booked a table, only to find a queue of people out of the door and down the street waiting for tables. There was plenty of demand, but no staff.
So the Reserve Bank’s one-dimensional approach to a problem that they created may not have the effect that is expected. Under present conditions, I suggest that, rather than force people to close their wallets, it is more likely to force people into severe hardship, as they struggle to afford basic foodstuffs and fuel to get to work. Remember that, as a brilliant electoral bribe, the Government is putting back the fuel levies and restoring public transport fares to full price this year. They could hardly have picked a worse time, as petrol prices will go back up to close to $3 per litre again. Don’t forget; fuel price hikes increase the cost of everything, as goods are not transported by horse and cart anymore. We are in for a rough ride.
Grant Robertson giving Adrian Orr another five years at the helm of the Reserve Bank was an exercise in economic vandalism. They are partners in crime. It has often been said that using only interest rates as a tool to control inflation provides a very narrow scope. But when you have a minister of finance and a Reserve Bank governor who do not seem to grasp the principles of Economics 101, the country really is in economic trouble.
