Rejoice! Economists and political players alike are celebrating the recent downturn in the rate inflation, heralding the war on inflation as good as won. Parliamentarians of different party colours and persuasions have even made some optimistic remarks, suggesting that New Zealand's inflation woes are behind us and that light is at the end of the tunnel.
However… declaring victory feels premature with many underlying issues remaining unaddressed.
While global inflation (imported inflation) has seen a significant decline and back to historic norms, domestic inflation in New Zealand tells a different story. This remains stubbornly high with both Central & Local Government and the private sector doing their best to imitate a Doctor Dolittle pushmi-pullyu act. (pronounced "push-me—pull-you")[i]
Essential costs like insurance, rates, and power continue to rise, straining household budgets. Insurance premiums have soared by over 20%, and local rates have increased by 20% to 25%, adding to the already groaning weight of financial pressures on New Zealanders.[ii] [iii]
Soaring power prices are another looming concern. Wholesale prices are currently 100% higher than at the same time last year and are 50% higher than 6 months ago.[iv] Once power retailers' hedging contracts expire, these increasing costs will become mainstream, further burdening consumers. [v] This escalation in power prices is a critical issue that requires immediate and effective policy interventions to prevent another significant impact on the cost of living for many New Zealanders that will add to our inflationary woes.
Bear in mind: It's not solely up to the Reserve Bank's to sort out inflation, even if it is their mandate (which is generally the purists' view). Inflation is more complex than that. These soaring energy costs reflect a major can-kicking issue from successive governments over the past few decades – unfortunately, the chickens are coming home to roost now.
Yes, the drop in global inflation is indeed a welcome relief. But it’s vital that we recognise this as largely beyond our control.
As a country almost literally at the end of the earth, New Zealand is more prone to shipping inflation than any other developed nation. Coupled with our short-sighted ban on oil and gas exploration, we lack energy independence despite our abundance of natural resources. We’re vulnerable to these pressures, and we don’t have a backup plan.
Global markets are volatile and can be influenced by a myriad of unpredictable factors. Another geopolitical event could easily trigger a dramatic spike in global inflation. For instance, a flare-up in Yemen or disruptions in global shipping could swiftly reverse the current trend.
The geopolitical landscape remains unstable, and relying on the current downtrend in global inflation without addressing domestic issues is a precarious strategy. The recent conflict in Ukraine is a stark reminder of how quickly global dynamics can change, leading to economic shocks that ripple across the world.
If a similar event were to occur, such as heightened tensions in the Middle East or significant disruptions in international shipping routes, New Zealand’s economy could face severe repercussions.
Moreover, the ban on new oil and gas exploration has left New Zealand more reliant than ever on imported energy; thereby making us susceptible to international market fluctuations. This policy was intended to push for greener energy solutions but lacks a comprehensive transition strategy to ensure our nation’s energy security in the interim and at a cost that allows commerce to flourish.
Addressing domestic inflation requires more than just celebrating global trends. It demands comprehensive policies and proactive measures to tackle the root causes at home.
The Government needs to address the rising costs of essential services such as insurance, rates, and power. The rampant increases in these areas reflect not only the direct impact of inflation, but also the cascading effects of other economic policies over the last 3 decades.
The business sector has trimmed its inflationary intentions in recent years, and households have closed their wallets, but the Government sector has been a laggard, with meaningful charge to expenditure being half hearted at best.
Effective regulation and oversight are essential to ensure that these costs do not further spiral out of control and place an undue burden on households.
Only by addressing these domestic issues head-on can we claim a genuine victory in the battle against inflation. It is crucial to develop a multifaceted approach that includes energy independence, economic diversification, and robust regulatory frameworks.
In doing so, we can ensure lasting economic stability for New Zealand and protect against future inflationary pressures.
Celebrating global trends without tackling local challenges is a recipe for complacency and potentially more economic hardship. The path to true economic resilience lies in proactive, thoughtful, and comprehensive policy-making that addresses both immediate concerns and long-term goals.
by Nick Stewart (CEO and Financial Adviser at Stewart Group)
· Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX & BCorp certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions. Article no. 367.
· The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
[i] https://theweek.com/articles/889613/tribute-pushmipullyu
[ii] https://www.nzherald.co.nz/nz/the-cost-of-insuring-a-home-is-rising-six-times-faster-than-incomes/H5LBTNGIGFGLNE6SDENRG36FCM/#:~:text=Latest%20figures%20from%20Stats%20NZ,highest%20annual%20increase%20since%201987.
[iii] https://www.nzherald.co.nz/hawkes-bay-today/news/hawkes-bay-rates-hikes-havelock-north-property-could-pay-700-annually-for-public-transport/ZEEHMX4SZNGAHHYUJRVUXFUG6A/#:~:text=Regional%20council%20rates%20are%20proposed,halved%20under%20the%20proposed%20changes.
[iv] https://www.interest.co.nz/charts/commodities/wholesale-electricity
[v] https://www.rnz.co.nz/news/national/523054/why-electric-kiwi-is-closing-to-new-customers-and-why-it-matters
