Content sourced from The Conversation.
By Rahul Sen and Sadhana Srivastava*
You don’t have to be an economist to know New Zealand faces its highest annual inflation rate in 30 years – 5.9% as of December 2021. Visit a supermarket or petrol station and the evidence is right before your eyes.
The average price of petrol per litre is now up by 31% compared to last year. In some places, it has already hit NZ$3 a litre. To take just one grocery example, tomatoes doubled in price during the same period, contributing to the highest annual food price inflation since 2011.
These severe price hikes are a direct reflection of the impact of the global pandemic on tradable inflation – that is, goods and services we either import for our own consumption or as components in our own manufacturing and exporting processes.
Since mid-2021, annual tradable inflation has been outpacing non-tradable inflation (the rising price of goods and services we produce and consume domestically) – 6.9% versus 5.3% at December 2021.
While tradable inflation accounts for about 40% of New Zealand’s overall inflation, the pace at which it’s growing means external sources are increasingly fuelling inflationary pressure.
Pandemic pressures
Much of this can be sourced back to the effects of the pandemic on global supply lines. Three key factors are driving the pressures:
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Costs of raw materials and other inputs are rising at each stage of the supply chain, with factories closing and reopening due to changing restrictions. The semiconductor industry, for example, has been facing a chip shortage since 2021.
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Logistics and transport costs are rising due to massive disruptions at the distribution end of the supply chain. Reduced airline capacity and rerouting of cargo, coupled with lockdowns and isolation requirements, have led to delays in unloading cargo at ports and slower turnaround times for ships. Freight company Mainfreight, for example, expects delays of 20-30 days above normal shipping times for Auckland.
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Energy costs are rising, partly due to recovery in global demand in 2021, combined with supply shortages and cartel-controlled production.
These combine to cause disruption at each stage of supply chain – production, transportation and distribution – forcing New Zealand to “import” more inflation on top of what is being generated from within its own economy. Vehicles, fuel, clothing, processed foods and manufacturing materials have all been affected.
Supply chain vulnerability
The rising cost of house construction provides an illustrative example. Prices go up when, say, imported iron girders cost more to produce in their country of origin, in turn caused by costlier imports of iron and steel.
On top of this there can be delays in shipping the materials due to port closures or workforces affected by the pandemic.
Similarly, the scarcity caused by a worldwide semiconductor shortage means higher costs of production for electronic products and new vehicles, pushing up retail prices for imports.
Above all, rising energy costs are a financial body blow to the transport and logistics sector – the backbone of the local economy. The geopolitical tensions over Ukraine and Russia – both major oil and gas producers – simply add to the risk of spiking imported energy costs.
The pandemic has exposed New Zealand’s ever-present vulnerability to global supply chain disruptions. If the emergence of new COVID-19 variants affects New Zealand’s major trading partners (China, Australia, US, EU and Japan) imported inflation will remain a problem throughout 2022.
No quick fix
The unpredictable impacts of the pandemic on supply chain-led tradable inflation create a tough balancing act for policymakers because the causes are out of their direct control.
The Reserve Bank’s use of interest rates and monetary policy to maintain short-term price stability has worked well when domestic factors drove inflation. It’s a lot trickier when external supply shocks become the key drivers, and inflation predictions are clouded by global uncertainties.
Some relief could be provided by the government reducing GST and fuel taxes, but this is not a quick fix. In the medium to longer term, New Zealand needs to diversify risk and bring some supply chains back within its own borders.
The government could take a cue from the trilateral supply chain resilience initiative (SCRI) launched last year by two of New Zealand’s main trading partners, Australia and Japan, and the fastest-growing emerging global market, India. Its aim is to identify key sectors vulnerable to supply chain shocks and invest in their resilience to future uncertainties.
For now, however, New Zealand can count on an unpredictable road ahead, and should be ready for the possibility of even higher inflation than the year before.
Rahul Sen is a senior lecturer and Sadhana Srivastava is a lecturer in economics at Auckland University of Technology. This article is republished from The Conversation under a Creative Commons license. Read the original article.
30 Comments
Well, we could always rescind the gas/oil ban, get the Chatham Rise phosphate mining rolling (sucking,?), open cast the 40 million tons of top grade steel making coal under White Knight (Indian steel makers were a JV partner in the original mine), and build our very own nuclear powered shipping line for coastal and trans-Tasman trade.
Resilience....
waymad,
"and build our very own nuclear powered shipping line for coastal and trans-Tasman trade" Why stop there? Surely we should be building all our own cars, trucks(nuclear powered?), planes etc.
I would really like to see your preliminary cost/benefit analysis for these nuclear ships. It has certainly given me a good chuckle this morning. Thank you.
Hey, I'm in the Grand Ideas mode early in the morning, check the posting time....others can do the Hard Mathy stuff. I can even add to the Ideas:
- Open up the abandoned Cu mine on Kawau Is
- There's U up the Buller
- There's Cu and Cr in Nelson's back yard
- There's Sb at Endeavour Inlet in the Sounds
- And enough lignite under Southland to run existing ICE transport for 300 years with liquid fuels conversion.
But Snails.....
"Lignite deposits in Otago and Southland contain more than 9 billion tonnes in 10 major deposits. This is a very large, nationally significant resource which has the potential to be used a feedstock for a petrochemical industry, using gasification technology to convert lignite to fertiliser, transport fuels or other high value energy products.
If extracted at a rate of 20 million tonnes per year, the lignite resource could provide energy and feedstock for most of New Zealand’s transport fuel and petrochemical requirements for over 300 years. Mining studies in the 1980s estimated total energy content of mineable lignite at about 75,000 PJ. This is equivalent to about 20 times the energy content of the Maui gas field."
waymad,
That's not so early. We were well into our beach walk by then.
We need people with lots of ideas. However, I am not so sure about lignite. I think I am right in saying that it's not a very efficient fuel. It releases around twice as much CO2 as natural gas. That doesn't sound like a great idea to me.
And what then? Not into big picture, or long term thinking then? Burning your house down cause you're feeling chilly has never been the brightest move. I guess if you aren't concerned about the resources/environment future generations will need to survive, or even prosper, your plans are sheer genius.
Agree with the basic premise here - but when corporate profits are increasing in the same sectors as prices, it is negligent not to mention price gouging as a contributory factor to both imported and domestic inflation.
What we are learning (again) during this period is that prices do not flow from econ101 supply curves, they are primarily a function of what companies think they can get away with charging.
When Marilyn Monroe famously sang 'happy birthday' to the US president, the second verse praised the actions he took to stop US Steel price gouging ("the way you deal with US steel"). That's my favourite inflation story - thought I'd sneak it in.
Ha! Let's give that a go...
- I might start my own shipping company - oh no, the heavily consolidated global shipping industry has contracted all of the available space at ports and has used the pandemic to lock the big customers into long-term futures contracts
- I know, let's start a supermarket chain. Oh, dear, Foodstuffs and Woolworths outbid anyone looking to buy a suitable patch of land, and they have a stranglehold on wholesale and distribution
- Nevermind, there is always building supplies - oh no, crap, the manufacturers of what I would sell have their own retail arms, and exclusivity deals with overseas suppliers.
- Got it! Let's start a timber mill - we must need cut timber for all these houses we are building. Oh, jeez, I give up, it seems kiwirail subsidise the transport of logs out of the country, and China give the sawmills free power over there meaning I can't afford to buy logs here and produce competitive products!
- Well, last chance, I'll pitch to become the head of the royal family in Saudi Arabia so that I can fix the price of oil and make billions. Book the next flight...
Yup, pretty much the definition of anti-competitive behaviour in those market segments. Despite the idea that the free market would encourage competition to join due to the profits on offer, the barriers to entry are just too high to overcome without some serious support ($$ or government intervention).
I wouldn't object to strategies to reduce barriers to entry and encourage competition.
Also I've often thought the building supplies industry is ripe for disruption, but builders are too stuck in thier ways to try new methods. We are still building houses in much the same way as we were 100 years ago.
Maybe, just maybe, escalating prices and lack of availability will force some innovation.
Had an informal chat with a chippie/builder a day or two ago. I specifically asked what material shortages there were. He mentioned two. Dry wall/plasterboard and fibre cement soffit board. Made an enquiry directly with the main competition for drywall/plastboard which comes out of Thailand. Around 5-6 months. There sales team have been told to say something fed by management to the effect that there is excess demand. Tried to pin down further. Can't the factory make enough. Not a clear answer and soon reverted to another reason which is much more plausable. Shipping problem. I don't know about lockdowns in Thailand but I suspect they can produce enough under normal circumstances but likely to be a backlog.
Can't get steel, I'm waiting for garage door to be replaced, 3-4 months lead-time, range of colours reduced so that they can increase output at Glenbrook (and ask if their aussie parent might have taken stock planned for the NZ market and see how they respond)
Can't get trusses, Wait time from the factory for prenailed is 24 weeks.........
Can't get Gib, they are full and only giving limited orders until mid year
Can't get tiles - shipping issues
Can't get landscaping timber, landscapers are buying up 3-4 months in advance to ensure they have the materials for their work
Shipping is a nightmare, NZ timber mill capacity reduced over the years, our market is set up for modest stable growth,
The Auckland Unitary plan has allowed many other builders to lift growth - buying and demolishing smaller houses and fitting 4 on a site. Government claim to be trying but are really redirecting private industry efforts to themselves, interest rates got so low that everybody set out to add on to their homes.
I spoke to an architect who has a passionate dislike of a major NZ building supplier. Why? The architects looked to use a high quality material they could source independently from Canada for part of a major build. The building supplier told them "If you do that we won't supply you any of the other stuff you need...good luck getting it."
So even where there are good alternatives available sometimes market power stops them in other ways.
I hear this word innovation being thrown around everywhere as if it means something.
There are plenty of "innovative" materials that have been around for centuries. Take hemp for example. Literally forced out of the market by vested interests. It would appear that "economics" and regulations don't allow it to be a viable resource, at least not in NZ.
Here's an innovative idea. We've tons of cheap logs that we're happy to ship to China. Maybe we could create and build simple, modern log cabins instead. Maybe we could produce simple pine furniture and ship it around the world.
It's a shame no one realises the "free market" was promoted by the merchants who didn't want regulations on their activities. It's the same as, rules for thee but not for thy.
Funnier still is that "economics" viewed itself as a social science, based on human behaviours and what we've all come to believe is a fixed human nature/condition.
So by all accounts someone should've seen this coming.
Here's a thought. How competitive is the FMCG industry if most brands can be traced back to one of half a dozen corporate behemoths?
There's a cargo ship currently on fire carrying half a dozen well known luxury car brands. They're all owned by the VW Group. Competitive markets have become an illusion when they're consolidated into the hands of a few.
Agreed KW, far more like that we see corporates here stick with the same model but just bake in even more of a premium given they know now that people will just keep wearing an ever-widening gap between local prices and the price of the same goods in other markets. After all, they know what we're prepared to pay now, and it's (even) more than what they've been charging.
The only meaningful way of easing inflation in this country is to end all lock-downs, open the borders fully and COVID measures such as vaccine mandate.
However I don't see the Labour government keen on any of the above; hence, the inflation may somehow be sustained through our own doing.
My mate working in semiconductor design says we won't see the peak of the global chip shortage for another 8-12 months. This is going to hit more than just cars, mobile phones and laptops in due course.
This crisis could soon reach critical equipment in mines, factories, power systems, etc. and spell further doom for supply chains everywhere.
Funny that there were a couple few self-serving housing specuvestors claiming (as comments posted in the article about whether the RBNZ will raise by 25bps or 50bos) that inflation is already subsiding and therefore not a problem requiring meaningful action on part of the RBNZ.
I am not sure if this is due to them being disingenuous or just delusional.
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