Great price panic spells bad news for Labour

If so much can shift in one year, what kind of political pressure could we see if price hikes . . . persist for another 12 to 18 months?

Prices are not going in the direction people expect or want, and the Government largely blames all these rises on international factors – you can see its panic over this issue in announcements on everything from climate change to immigration.

It is a big shift from a year ago, when it was a struggle to get the Government to acknowledge supply chain issues as more than just a debate about where the Ports of Auckland should go.

On a tour of the Sleepwell factory in Ō tara in February last year, Prime Minister Jacinda Ardern was asked how long supply chain issues might persist, and what government support firms should expect. Her reply made it clear she saw the whole issue as more of a local one involving the Ports of Auckland than a global phenomenon.

‘‘Unfortunately you might be asking the wrong person the questions there . . . The port is not something we control, and so those questions would be better directed to those who do have a bit more of an ability to effect change.’’ As for whether businesses should think about increasing their resilience or building up their local manufacturing capability, Ardern replied: ‘‘No-one should have to do that because of delays at the port.’’

What a difference a year makes. Now the Government is arguing the opposite – that supply chain issues are a global problem and driving up inflation everywhere.

The Reserve Bank of New Zealand is planning an interest rate-hiking cycle so steep the market doubts whether it will follow through with all of it, and the Government has signalled it is hitting the brakes on new infrastructure projects to avoid overheating the economy. If so much can shift in one year, what kind of political pressure could we see if price hikes on essentials and other goods persist for another 12 to 18 months?

Price rises have not just brought back the spectre of 1970s-style inflation, but also that decade’s trend of governments getting more involved in setting a ‘‘correct’’ price for things. It’s difficult to fathom now, but there was a time when the president of the United States even set the price of hamburgers.

But in granting fuel excise relief once petrol hits $3 a litre, isn’t the Government saying what it thinks the price of fuel should be? In taking action, wasn’t it implicitly saying a pump price of more than $3 a litre is just too much for any New Zealander to pay?

At a post-Cabinet press conference, Finance Minister Grant Robertson was quick to swat away any hint that the excise reduction was an attempt to set the ‘‘correct’’ price. His best argument on this front is that the cut hasn’t worked – petrol is now back over $3 a litre. ‘‘We have not set the price of fuel, that will be obvious to everybody who is going to the petrol pump . . . I wouldn’t say that we are moving more into the area of setting prices, what we’ve tried to do is support New Zealanders with the cost of living.’’

Sense Partners economist Shamubeel Eaqub has drilled down into the different prices. Rather than broad price rises across the board, he sees a combination of individual price changes linked to international events. This has implications for how this crisis might play out.

Eaqub says if you look at the United Kingdom and New Zealand, there are strange differences in the pace at which prices have increased. In New Zealand, the price of clothing and footwear, communication, household contents and services, education and alcoholic drinks are all rising at a rate that lags behind the UK. On the other hand, inflation here is running hotter than in the UK three big areas: food, housing and transport costs.

‘‘How come our prices of clothing and footwear inflation are less than the UK?’’ he asks. ‘‘How come house contents and services is less than the UK? How come communication is less? Well, that’s because we don’t have generalised inflation.’’

He estimates only about one-quarter of inflation is linked to excess demand. So price pressure could well persist even with interest rates going up, and this could make for some angry voters who see the cost of mortgage repayments increasing with no payoff in terms of reducing inflation.

In such a political context, will voters remain as committed to things like central bank independence? Will politicians be happy with a Government that just lets prices rise?

High prices often work themselves out: they encourage people to buy less and firms to invest in extra production. But keeping politicians’ hands off the scales will prove a big ask if the panic around prices persists.