In its monetary policy review this week the Reserve Bank said while the Covid-19 pandemic has caused major disruptions to supply chains, pushing up costs for businesses and consumers, these cost pressures should ease over the course of 2021.
Will this prediction prove to be correct? Or is it wishful thinking?
In the Reserve Bank's press conference interest.co.nz's Jenée Tibshraeny asked Governor Adrian Orr to explain the Reserve Bank's view. Orr's detailed and lengthy response basically boiled down to the following:
"We are confident given the nature of the one-off shifts in the prices that we are currently observing, the global spare capacity that's still out there in the world, a long history of low inflation that we've had globally, and well anchored inflation expectations, that the risk of a one-off price shift turning into generalised inflation remains low," Orr said.
"As central bankers we'll always say it [risk] doesn't remain zero and that is why we will continue to monitor. But we are very explicit, we believe these [cost pressures] will abate."
(Jenée's question, and Orr's full response, run from seven minutes and 30 seconds into this video).
So what's going on?
In its Monetary Policy Statement the Reserve Bank summarised just what the issues are and why they're occurring.
"Global supply chains have struggled to keep up with demand since the outbreak of COVID-19. This partially reflects a global shift in consumer spending towards goods because the pandemic has made it harder to spend on some services. Demand for goods has been boosted further as firms around the world have sought to restock depleted inventories. Some firms have also brought forward purchases in anticipation of further disruptions. This strong increase in demand has lifted prices for key commodities [see chart below], pushing up production costs."
"Supply chains have also been disrupted. Pandemic restrictions have meant some firms have not been able to produce as much as usual. Restrictions have also limited the availability of workers and how productively they can work. Transport networks have been disrupted as the pattern of global shipping flows has changed. Fewer passenger flights have also meant reduced air freight capacity. The blockage of the Suez Canal in March further contributed to delays in moving goods around the world. Combined with strong demand, these factors have created congestion and delays at key ports globally and have significantly increased global shipping costs," the Reserve Bank said.
"New Zealand firms have faced increased prices for imported goods because of these supply-chain bottlenecks. Domestically, some of New Zealand’s ports have found it difficult to keep up with shipping volumes. This has put pressure on road and rail transport networks as freight has been redirected from other ports by land. The cost of shipping goods to and from New Zealand has increased significantly, particularly for container-based freight, which includes many consumer goods."
"In addition to higher import prices, firms are reporting delays in getting goods into New Zealand. In some cases firms’ global suppliers are facing difficulty filling orders. This means some firms may not be able to produce goods as usual due to shortages of key inputs such as chemicals, parts and other materials. In the retail sector, difficulties in getting new stock from overseas have discouraged promotional discounting in some instances," the Reserve Bank said.
The two charts below come from the Reserve Bank's Monetary Policy Statement.
The Reserve Bank, remember, is tasked with keeping future annual inflation - in the form of Statistics NZ's Consumers Price Index (CPI) - between 1% and 3% over the medium term, with a focus on keeping future inflation near the 2% midpoint. In the March quarter this annual inflation rate was 1.5%. And the Reserve Bank's latest quarterly survey of inflation expectations predicts an annual 2.05% CPI rate in two years.
Where the rubber meets the road
But the Covid-19 pandemic and its side effects are rumbling on. So will those cost pressures flowing from supply chain disruptions really disappear this year as Orr and the Reserve Bank believe?
Don Braid, managing director of freight, supply chain and logistics company Mainfreight, sees pricing pressures lasting longer. Braid told RNZ that Mainfreight thinks the current situation will continue for at least a further 12 months. He says if you're looking for guaranteed space on a ship you could currently be paying $5,000 to $8,000 more for a 40-foot container than you were pre-Covid-19. Contract rates in place prior to the pandemic aren't be honoured, he said.
"My sense is it's not going to change in the short-term and we'll have this shipping congestion and high rates for some time to come...There's port congestion at every major port around the world, and it's very tough to get space," Braid said.
"Shipping companies are making you pay what the market rate is today. We're having to pass them [costs] on."
This, Braid said, is flowing on through importers and exporters to retailers and potentially consumers.
"We think this current situation will last four at least 12 months. We were talking with one of our largest customers in the US and their people are planning for the current situation to possibly be around for another four years. Now that would be catastrophic," Braid said.
Airfreight will be slower to 'normalise'
Speaking on Bloomberg TV, Ryan Petersen, CEO and founder of US-based Flexport Freight Forwarding, noted US imports have risen 20% and exports have dropped 20% since the onset of the pandemic. In the pre-Covid-19 world Petersen said about 60% of containers sent from the US to China were empty. Now that number's up to 80%.
In terms of when ocean freight will normalise, Petersen said this could happen when consumers return to pre-pandemic spending habits. This would mean less online shopping and going out more to the likes of bars and restaurants.
"There are only so many dollars a consumer has so as they shift it back towards hanging out in bars and restaurants instead of buying stuff, it should even itself out," Petersen said.
Airfreight, however, is another story. Petersen said pre-pandemic, 50% of all the world's airfreight flew in the belly of passenger planes, and flight volumes remain way down on where they were.
"Passenger planes, especially going to Asia [from the US] are just not really flying. They're down to one or two flights a day when it used to be 25 for most major hubs in Asia. So that has led to crazy increases in the price of airfreight and that will have to work out," Petersen said.
"CEOs of major airlines have said they don't really think business travel across the Pacific is going to come back to life until 2024. So it's going to be a while before airfreight normalises."
On Thursday Transport Minister Michael Wood announced a new round of airline support contracts running until the end of October. New agreements have been reached with Air New Zealand, Air Tahiti Nui, Korean Air, and China Airlines. Airfreight capacity is at 90% of pre-Covid-19 levels, Wood said.
Air NZ said it has been awarded an average of 30 flights per week to 13 destinations including Los Angeles, Hong Kong, Shanghai and key Pacific ports. With the Australian and Rarotonga bubbles now operating, services to Australia and the Cook Islands are currently operating outside of the government air connectivity scheme.
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56 Comments
"There are only so many dollars a consumer has so as they shift it back towards hanging out in bars and restaurants instead of buying stuff, it should even itself out," Petersen said.
And there is the answer - after meeting the costs of financialisation and taxes etc disposable incomes are constrained, same with the seeds of consumer inflation.
Prices are rising, we all see it. What is not known is how much of this is attributable to supply chains playing catch-up - which is why I think CB's hold the stimulus line. If wages start rising though, then it's time to pay attention.
De-carbonisation is going to create plenty of inflation and a drop in the living standards for all of us because wages simply will not keep pace.
Will be interesting to see if the FPA regulations and the jump in apprenticeship take-ups lead to notable increases in wages and productivity.
I don't dismiss FPAs altogether because collective wage increases at the bottom rung of the income ladder come with the promise of killing off the abnormally large number of low-value businesses dominating our economy solely on low-wages without the owners bringing sound management practices, innovation or modern tech to the table.
De-carbonising can be seen as de-energising. And de-energising is de-working. And de-working says less done.
If you're of the old school who equate 'living standards' with consumption, then yes, your 'standards' will fall (on average; typically in the end-games the elite seem to do better until it all falls over).
Some of us see the need for other values - other measures of 'living standard'. Like, liveable habitat, for instance.
pdk,
Apologies if i have already sent you this.https://www.cell.com/joule/pdf/S2542-4351(17)30083-1.pdf
I got it from Brian Fallow at the Herald.
News for ya, supply chains aren't catching up........... costs are still rising, and capacity is just as constrained as it was in December, worse even across most ports.
No one is even talking decarbonisation, they are talking about how to get basic products, including for food and construction products to markets around the world. However, the profitability of the shipping lines has hit a high point, so if we can live the with extra costs for everything we buy, then perhaps just levy the fuel for the shipping lines. I think once the true extent of the higher prices are seen in the next CPI read, everyone sounding a warning might get taken seriously.
Wages are another issue, even unskilled workers are wanting 25% above minimum wage, and there is no one else around, so its either don't produce, or pay the higher rate and charge the end user.....
Big long term inflation is coming and everyone knows it, even the Reserve banks know it, but they won't admit it. They need to pretend that everything is ok so the pyramid stays intact. They need to not upset the chosen ones, the speculators. The Reserve banks job now is to try and fool the masses for as long as possible before all hell breaks loose. Unfortunately the longer you leave these things to fester, the worse the prognosis. We are in the middle of a dead cat bounce on springs but in a few months the cats coming home and it won't be a pretty landing. All this extra mess to everyone just because Orr had his favourites.
RBNZ not at the coal face.
As an importer, you need to fix the price your customers buy from you. Price doesn’t float off currency fluctuations. We’ve just received our updated pricing from offshore factories. Our cost price is up over 10%. Ocean freight continues to rise and is 450% higher than it was pre Covid. No sign or discussion that shipping lines are going to increase capacity to make less money. It’s the perfect situation for them. Make more with less cost. Cost increases I imagine are the case for many importers. Which will put a lot of upward pressure on price.
Correct. Other raw material increasing at fast rate, and shipping a problem.
Ocean freight capacity is so limited because boats are sitting at main shipping ports full, at Auckland they wait around 8 days, on top of a 29 day journey (plus unloading). So a normal 32 day cycle is taking 40 days, so every 5th journey is lost.
Therefore capacity to deliver to markets is at 80%, and all boats are full, so it will be a long time before the gummed up supply chain is cleared, and the problems will remain because there is no circuit breaker to fix the issues.
No, simply because freight and raw materials are in such short supply. I would be surprised if you don't see increases in the region of 5-10% on almost everything. As a matter of fact, check your supermarket shopping now.
Suppliers to my business have taken 5-15% increases, on items from brushes, to metal, to milk, even nuts/bolts/screws have gone up 8%. Anyone buying commodity products will have cost increases in the 20-25% level despite currency improvement. Then try and buy computer parts, cars, Gib, plywood, bathroom fittings at the moment.
When the dollar changes 5% and costs change 25%, where do you think prices will go?
Monetary policy has typically only been capable of temporarily increasing CPI inflation so I suspect we'll see it fall back. Had we been building major infrastructure like roads, charging stations, high-speed rail etc. my view would be different because productivity and wages would likely have also been lifted.
Had we been building major infrastructure like roads, charging stations, high-speed rail etc.
Our governments announce these, pop the champagne, spend millions on contractors to draw plans and consult with every cohort in the country, only to go back to the drawing board several times.
If only importing infrastructure (getting our belts and roads made overseas) didn't come with national integrity troubles!
From what I've seen projects often gets bogged down in public and special interest consultation, comitees, commissions etc. long before they ever make it to the drawing board.
Often it results in highly dubious choices as well, like the new Tararua Highway routing traffic through the town of Woodville. This was the perfect opportunity to divert traffic around a town centre rather than through it.
With very few of the members of parliament having ever worked, they have little or no regard for the pressures businesses have to go thru to turn a profit. The government are continually adding more and more compliance and financial obstacles which eventually will create failure for many.
Labour show no sign of understanding business or the consequence of borrowing $770,000,000.00 per week.
The business owners you have been talking to go by the title "sweatshop owners" or "slumlords".
Not taking jabs at the international tourism sector: those businesses have my sympathies. However, this pandemic is an ongoing global issue and every business comes with its own set of unforeseen risks.
Most businesses not living off people movement, vulnerable tenants/students and nationwide accommodation shortages are doing quite well.
So much infrastructure stimulus and the stickiness of price rises, increasing environmental and regulatory considerations, coming off a low in interest rates and dip in oil prices.....combined with increased house/rent costs... I'd me surprised if prices don't shoot up the stabilize at higher levels with maybe a small dip/settle after the high as some competition gets the price gougers.
Notice Mr Orr says Nil re inflation due to huge excess liquidity supply in last 12m
And nothing about impact of asset price inflation on overall inflation.
Plus, are consumers assumed to just absorb reduction in their real disposable income in this temporary period???
Hi Gareth, check with Jeene his response on housing.
His comment and observation on rising house price was a masterpiece : Today's high price after few years will seem to be normal.
By this analogy even after prices have gone up from Sat $900000 to $1300000, not to worry even if it goes up to two million as than think much longer, after 10 years or 15 years, the price of 2 million will look normal.
What a genius, this person is and more remarkable are the journalist who fall for this logic.
Oops, posted this in another article by mistake. A friend who is a developer is posting price increases as they come in. I hear also that copper for wiring is up 33%.
Effective May:
• Steel and Tube Holdings - 2-16%
• Ecko Fastening Systems – 2.75-9.85%
• Mitek - 5.2%
• Rosenfeld Kidson and Co - 33%
• Permapine - 5-7%
• Eurocell Wood Products Ltd - 3-4%
• CHH Woodproducts – 8-10%
• PSP - 5%
• Clearlite Bathrooms - 4-6%
Effective June:
• Steel and Tube Holdings - 4-16%
• Riverlea Group - 4.17-8%
• Windsor Brass - 5.51%
• Sika NZ - 3.2%
• MSL - 8-14%
• Paslode New Zealand - 4%
• Rosvall Sawmill - 5%
• Southern Pine Products - 6-11%
• Niagara - 5-8%
• CHH LVL - 5-15%
• Max Birt Sawmills - 4-8%
• CHH Woodproducts - 5-10%
• Red Stag Timber - 5-7%
• ITI Timspec - 4-10%
• Winstone Wallboards - 2.9%
• Roofing Industries – 2-25%
• Bowers Brothers Concrete – 4-5%
My own experience in last 6 weeks since I started paying attention.
- haircut 10%
- morning beverage 12%
- rates over 7%
- my lunch when I buy it about 5%
- friend who sells flooring building product says 12%
- work project cost reviews 15%
- colleagues work project 5%
How many of the 100's of small scale infill developments underway all over Auckland right now are going to be hit with these increases? Is the population pool of financially viable renters/buyers for these properties increasing right now? How long can the developers carry the financing costs before they need to discount the sale price?
But, fuel prices are at their highest (in NZ at least) and Royal Dutch Shells losing outcome in the Dutch courts serves notice to the world that the cost of fossil fuels will not go back down, much, it at all. Theses costs flow through to all parts of the economy. So he is in denial at least ignoring the obvious at worst.
Or is he trying to support a government position that undermines workers pay claims?
They're all trying to keep the show on the road. I doubt it goes much deeper than that.
What we need, is a Systems-thinking all-subject-meshing Think-Tank (or Commission) with the brief of looking ahead say 50 years. Bollards lot and Carrs lot aren't on that plane, although they might end up there via discussion....
Elevated domestic and international freight costs, higher minimum wage rates, private sector wage growth, Goffs impending 5% rates rise, timber increases, supply and capacity shortages and the list goes on.
So tell me who's going to be lowering prices regardless, if the market isn't competitive. Or are the RBNZ expecting the banks to mitigate it on their own with individual increased interest rates.
interesting to say costs will abate,doesnt mean they will go down,rather thay will maybe increase at a lesser rate than before.like parcel post charges that increased july 2020 at the real CPI rate,then had a covid increase of 7% in october and have now abated to an increase of around 5% again.
China is hitting the end of a 30 year low wage industrial expansion, which its demographics can no longer support. Global prices on every manufactured thing are going up. To stop inflation from happening the world needs to realise some spare potential industrial capacity worth about 5% of China's industrial output each year and at a cost equivalent to or lower than China.
If Mr Orr thinks he can solve that problem by the end of the year, then best of luck to him.
https://www.newshub.co.nz/home/money/2021/05/housing-crisis-first-home-…
So called independent economist ( are not all economist suppose to be independent and the reason he highlights independent in itself indicate that....). Though agree with him that slight rise in rates will not make much difference to investors ....can say so as long as Mr Orr does not touch Interest Only loan and DTI.
I have posted this before, so apologies for the repetition.
Highly respect economist Dave Rosenberg also believes inflation is transitory.
Erik Townsend seems far from convinced.
https://www.macrovoices.com/975-macrovoices-272-david-rosenberg-inflati…
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