Inflation: should we be worried?
Inflation at 4.9% p.a. – No big deal.
What’s with inflation at the moment? Is it the chicken coming home to roost after the excesses of printing all that money last year? Possibly yes, probably no.
Inflation in New Zealand
Inflation for the year just passed, to 30 September 2021, was quoted as 4.9% and our Reserve Bank is meant to be keeping inflation between 1% and 3% per annum over the medium term. Should we be worried?
I had a look at the underlying data as sometimes large inflation figures result from sharp changes in the prices of one or two items that might be temporary, or one-off.
Let’s have a look at what caused this spike in inflation.
- Petrol rose 22% for the year but from a low base, due to Covid-19 restrictions last year. This component represents 16% of the quoted inflation figure, so petrol has a huge impact on our current annual inflation rate. Not much we can do about that unfortunately. Out of our control. And the signs are that oil production is catching up to demand, so this may not be a permanent feature. Remember how volatile oil prices can be.
- Another increase over the past year was the cost of a newly built home, up 12% for the year. And this factor represents 21% of the inflation number! One of the largest components. But it you are not in the market for a newly built home then this didn’t apply to you. So that takes one of the biggest items out of the inflation calculation for nearly everyone. Bank economists are suggesting that the supply of new homes will come into line with the demand for new homes by the end of 2022 and that there will be a surplus of new homes by 2023! Watch this space.
- Local Authority rates and payments saw a rise of over 7% for the year which was a catchup from smaller rate increases in 2020 due to Covid-19 pressures on rate payers. Not so much a big problem; more of a catchup from stingy budgeting during 2020 by Local Authorities.
Those three areas were the main contributors to the high inflation rate. Basically, petrol, new houses, and Local Authority rates and charges.
We have very little control over the cost of petrol and all we can do is try and not drive so much or so far, substitute other methods of transport for the family car, such as walking, cycling, public transport, car-sharing, and so on. Not easy, but possible in some cases. And then there is the electric car. Electricity prices went down for the year, see below!
Always interesting, some things were cheaper at the end of September 2021 than they were a year ago:
- Telecommunication equipment fell for the year by 15%
- AV and computer equipment fell for the year by 13%
- Books were cheaper over the year by 8%
- Pharmaceutical products fell for the year by 2.4%
- Electricity fell for the year by 0.8%
There were some crazy but interesting increases in prices for the year, however none of them amount to a very high impact on the inflation figure:
- Real estate services up 13%. Real estate agents selling housing!
- Professional services up 11%. Probably allied to the housing boom.
- Domestic accommodation prices up 24%. Opportunists.
- International air travel up 92%. Who actually cares?
- New car prices were flat. Yeah.
- Dental up 7%. Ouch.
- House rentals up 3.2%
- Tools and equipment for the home and garden, something I am very interested in, up only 1.4%
So overall, I don’t see anything there for us to worry about for the future, nor for the Reserve Bank to worry about. They should be able to see through these price increases and all the clatter that comes with it from the commercial banks, a group having a commercial interest in seeing interest rates going up. Journalists pick very lightly over the entrails too and usually come up with something sensational.
The 4.9% inflation rate is backwards looking. Dog tucker. Been there, done that. We all knew we were paying more for petrol, so no big deal!
How about looking into the future? The only thing we do have to worry about as a nation is inflationary expectations, or what is forming in the minds of Kiwi shoppers. If Kiwi shoppers think that prices are going to keep going up, then it will be a self-fulfilling prophecy. They will tend to want to ‘buy now; pay later’ and that will drive up demand artificially and when increased demand meets restricted supply, prices will go up.
Will prices continue to go up? Probably, because there is mayhem in the transport of goods around the world, by all accounts. But that won’t go on forever. Shipping companies are making super-profits. Price gouging is rampant. In the medium term they will pay for their actions. More goods will go by air, some local industries will be encouraged to produce things that previously came by ship, people will substitute expensive goods for other goods less affected by shipping woes. The ‘invisible hand’ will work its magic. Probably not fast enough, of course.
High petrol prices will feed into the price of nearly everything and that will continue to put prices up, for a while.
In the meantime, it is up to the Reserve Bank to get out on the road and ‘jawbone’ inflationary expectations downwards before Kiwis start believing that we are all going to hell in a hand cart. That and some expensive rises in interest rates to shock people into believing that they will have less money to spend on these expensive imported goods, like new cars, and new house builds. However, we don’t want the Reserve Bank to do what they did in 2014 when they raised interest rates four times in the year only to have to reverse them that same year. That was very disruptive.
Patterns of spending have been disrupted everywhere around the world by Covid -19; the money that would have been spent on travel and entertainment has been directed at home improvement and ‘toys’. The manufacture and distribution of those products that everyone suddenly wants can not keep up. So, the prices of those goods go up with the extra demand chasing the limited supply. It was like this apparently after the Second World War, in 1947 and 1948. Businesses that had been producing tanks for five years had to twist and turn to produce washing machines and kitchen ware. They couldn’t meet the demand from newly married soldiers and prices went up, until they didn’t. Eventually industry adapted, bought in new capacity, everyone got their homeware, and prices fell again to a more sustainable level.
Businesses responded to Covid-19 in early 2020 by shutting down production. As many as 114 million workers lost their jobs worldwide along with a huge reduction in working hours. Inventories of goods were allowed to run down. Then then great recession didn’t happen. The world recovered quickly and suddenly wanted things, in vast quantities. Demand shot through the roof while the supply of those goods has taken a lot longer to materialise.
This current period is a lot more like the late 1940s after the War than it is like the inflationary 1970s that a lot of people are worried about. We should be looking through this period of high inflation for what it is and focus instead on getting patterns of spending back to how they were, opening to the world again? In a measured way, of course.
Keep asking great questions …