Finance Minister Nicola Willis has blamed1 the ‘Trump spike’ for the jump in annual inflation to a two-year high of 4.1% in the June quarter2, but it didn’t have to be that way. Most of New Zealand’s biggest trading partners, including Australia and China, used fuel and electricity subsidies this year to soften the cost-of-living shock for consumers and help their central banks fend off the second-round effects of such an inflation surge.
In my view, it may have been cheaper for the Government to pay for the subsidies and avoid an inflation shock that has slowed tax receipts and increased interest rates. (See my full commentary and analysis below and in the podcast and video above, plus Chart of the Day and Quote of the Day. below)
Elsewhere in news around Aotearoa’s political economy of housing, climate and poverty this morning:
Auckland Council voted 17-53 for a hybrid housing intensification plan that would allow high-rises around train stations, but exempt 85% of the city from more intense development. This would allow up to 1.715 million homes to be built, which is more than the 1.4 million minimum offered in a just-the-basics option that was rejected.
But it could have been so much more. The original Plan Change 120 (PC 120) rules would have allowed supply of up to 2 million homes, but a revolt by National backbenchers earlier this year forced Chris Bishop to backtrack and specify at least 1.4 million homes.
That is at least up from the 1.2 million homes allowed under the current Auckland Unitary Plan set in 2016, and which has responsible for Auckland rents and house prices rising by less than they otherwise would have. Auckland Council economists had estimated house prices could have been 5% to 8% lower under the 2.0 million option. Instead, they are likely to be 3% to 5% lower under the option voted on last night.
In more inflationary news4 overnight, oil prices rose over US$91/barrel after Iran’s allies in Yemen closed the Red Sea to Saudi Arabian oil shipments, which reduces global oil supplies by a further 7%. Also, Donald Trump announced new 50% tariffs on US$20 billion worth of Canadian imports, including wine, hockey sticks, cement, dairy, swimming pools and wigs. He is also set to increase tariffs on a range of countries, including New Zealand, from 10% to as high as 15% later this week on the grounds these countries are not restricting slave-labour imports from China5.
In scoops this morning, Tom Pullar-Strecker reports this morning for The Post-$6 that Willis may propose a structural separation of Foodstuffs into separate Pak n’ Save and New World operations, saying: “The option of a structural separation in which we take interventions to encourage them to compete more strongly with each other ... is one that I have been looking at in detail.” Also, Mandy Te reported yesterday for Interest7 that MBIE recommended health and life insurers not be excluded from mandatory climate reporting.
In economic news8, there’s been two new blows for regional economies, with Gisborne losing Rhythm & Vines from next year and Marton losing New Zealand’s only malt plant.
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How New Zealand could have avoided the Trump spike
It didn’t have to be this way.
New Zealand could have avoided the spike in inflation in the June quarter if it had chosen, as many of our trading partners did, to subsidize fuel and/or electricity prices. Australia and China have done both. The Government’s decision not to soften the cost-of-living blow has both slowed spending, economic growth and tax receipts, but has also forced the Reserve Bank into as many as three rate hikes this year to fend off the second-round effects of the energy price.
It’s also not just petrol and diesel prices that are unnecessarily flowing into the economy and forcing Reserve Bank action. Electricity prices rose 12% in the June quarter from a year ago, adding to the 27.5% rise in petrol prices.
Table of the day: NZ inflation higher than UK, US & Australia
Chart of the day: Petrol and power drove inflation higher
