Price spike on the way but will it stay?

New Zealand is being told to brace itself for a year of price hikes as retailers and manufacturers pass on rising costs caused by pandemic supply disruptions. Should we be worried that we’re about to be hit in the pocket?

We’ve had more than a decade of false expectations since the world first emerged from the global financial crisis.

For various reasons — including technological change — inflation has simply failed to manifest.

The experts have been baffled and policymakers have had to head off deflation — a downward spiral of falling prices and wages.

Interest rates have stayed low and consumers are now used to cheap debt and stable prices.

But this time could be different.

Covid-19 is creating very specific problems with global supply chains and labour markets.

It is already creating supply shortages, which are pushing up commodity prices.

That’s been good news for our farmers and our economy as dairy, meat, fruit and wood prices have soared, bringing in much-needed export dollars. But local businesses are starting to feel the squeeze.

They report their costs rising, their margins shrinking and they expect to put up prices.

The latest NZIER Quarterly Survey of Business Opinion found more firms than not (a net 8 per cent) plan to lift their prices in the next year.

The Retail Radar survey of Retail NZ members also showed two-thirds of retail businesses expect to see prices increase over the next quarter.

Many sectors are also seeing wage costs rise as closed borders restrict the flow of immigrant workers.

This week the Stats NZ Food Price Index for March showed the average grocery bill has remained stable for the past year.

But in the US, inflation data is showing signs of a spike. March consumer price data there showed the fourth consecutive monthly rise, 0.6 per cent from the previous month and up 2.6 per cent from a year ago.

For anyone who lived through the 1970s and 1980s, this is still pretty low. But it is higher than the New Zealand Reserve Bank’s target.

For economists, the big debate is not whether this inflation spike is coming our way. But whether it will stick around. If it is a short-term trend caused by the pandemic, then central banks say they will look through it and keep rates on hold.

US economists are nervous, warning a postCovid recovery boom combined with government stimulus could mean ongoing inflation.

If it transpires, it will come as a shock for a generation of New Zealanders who have never experienced it.

Inflation makes people poorer. And hits the poorest hardest. It will flow through higher grocery bills and increased cost of living.

It would also mean interest rates rising sooner than many expect. That would, ironically, put downward pressure on the one thing that has seen massive inflation in the past decade — house prices.

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