War an excuse to hike prices even without fuel costs – economist

Source: Radio New Zealand

A leading economist says businesses could exploit the war in the Middle East to raise prices even when not directly related to the fuel crisis.

Petrol price surges have seen 91 routinely above $3 a litre and KiwiRail this week announced an increase on the fuel surcharge for freight on the Interislander ferry. Internationally, shipping company Maersk announced its own 27 percent fuel surcharge.

The Reserve Bank has warned that the fuel and transport costs would likely push inflation above 4 percent in the June quarter.

Westpac economist Kelly Eckhold told Nine to Noon on Wednesday businesses find it easier to lift prices when inflation is becoming widespread.

“[Many price hikes] you can shape back to fuel quite quickly. And in those cases, firms are taking their approach of imposing surcharges. So they’re saying, ‘Well, we’re going to put the price up by this amount’. It’s reflecting this increase in the oil or the refined fuels price.

“And then they say, ‘When those prices come down, we’ll remove that’. So that’s pretty transparent, isn’t it? And then that’s the sort of pricing behaviour that I don’t think the Reserve Bank or anyone would be very surprised by.”

But in other cases, Eckhold explained, prices are unlikely to drop when the price of fuel normalises – particularly if they cannot be linked directly back to the cost of fuel.

“When the services prices start to increase, for example, my Spotify subscription or your Sky subscription, et cetera, you’re very unlikely to see those prices fall back.

“What’s more likely is that is the price, that’s the base price that you’ll pay in the future. And the best you might hope for is that if costs rise less quickly in the future, then maybe the next increase that you see could be delayed for a period of time.

“That sort of inflation, I think, is less comfortable for central banks and the sort of inflation that they’re really all looking out for to gauge just how much… they have to increase interest rates by.”

The next official cash rate (OCR) update from the Reserve Bank is due on 27 May. The bank uses the OCR to increase or decrease the cost of borrowing – the former decreases spending and aims to curb inflation, while the latter does the opposite.

Eckhold did not believe the OCR would need to rise as much as it did following Covid-19, when it peaked at 5.5 percent in 2023.

“The conditions are a bit different. I mean, there we had a big supply shock coming from the Covid disruptions themselves, and then the onset of the Russian war, combined with very expensive fiscal and military policy. And that second set of factors isn’t really present right now, at least not in New Zealand.”

It could take a few more months to see the full impact of the Iran war on the economy here, Eckhold said.

“Fertiliser is a good example where we produce some fertiliser here, but a lot of it is actually imported. We got a little bit lucky in the fertiliser game because we had imported a lot of our needs for the next six months before the shock hit.

“The questions are going to arise about what happens after that period, and prices are lifting because global prices have gone up over 100 percent. An imbalance increased their prices yesterday by about 10 or 15 percent, starting to reflect that.

“But all through the rest of the supply chain, particularly think about plastics. So pretty much everything you buy comes in some kind of plastic container. That stuff is directly an offshoot of the naphtha market, which is a part of the oil distillation process. And those are the sort of price increases that are going to become really prominent, broad, but also come at quite a bit of a lag as that filters through the global supply chains.”

That delay could prompt the Reserve Bank to get ahead of any possible inflation, he said. The OCR was currently at 2.25 percent.

“They will probably realise that with this increase in headline inflation, that inflation expectations are likely to rise. And they’ll be trying to gauge how long this increase in inflation is going to last. And there, the news hasn’t been very good, because forecasts of the gulf war ending within a few weeks have consistently been disappointed.”

Whatever happens, it was likely New Zealand’s economy was in for a “tough time”, particularly through winter, with increased petrol costs slashing spending in retail and hospitality.

“I think the housing market is one that just won’t do very well in this environment, because we’re probably looking at a rising unemployment rate. Disposable incomes are being cut here by the cost shock. Confidence is also really low, and confidence is quite important for that.

“The other thing is to think about is the tourism market as well, because the costs of coming to New Zealand are probably getting more expensive and uncertain…

“New Zealand Incorporated has taken a big income loss here because we’re basically paying an extra, say, $6 or $7 or $8 billion a year for our refined fuels than we did in the previous year. When I look at that, that’s two-thirds of the dairy industry that we just lost in terms of income. And the government, the Reserve Bank, no one can give that back to us.”

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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand