A week – or even three days – is a long time in economics. The Russian invasion of Ukraine will lead to further inflation, which will make life more expensive … especially for low-income households and families in New Zealand.
Comment: There are significant domestic and global risks to New Zealand’s economic prospects as the number of Omicron community cases continues to soar, the cost of living keeps increasing, and the global economic uncertainty accelerates with the invasion of Ukraine.
The Reserve Bank noted in its February 2022 Monetary Policy Statement that the “current Omicron outbreak will lead to economic disruption and may weigh on consumer and investor confidence in the near term”.
There are two indices to help us understand the increasing costs of living in New Zealand: the consumers price index (CPI) and the household living-costs price index (HLPI).
The CPI measures how inflation affects New Zealand as a whole, whereas the HLPI measures how inflation affects different household groups.
Both indices are increasing.
The 12-month CPI inflation through December 2021 jumped to 5.9 percent, compared with 4.9 percent in September, 3.3 percent in June, and 1.5 percent in March.
In the 12 months to December 2021, the HLPI for all households surged to 5.2 percent, compared with 4 percent in September, 2.5 percent in June, and 0.7 percent in March.
These increases in cost of living are particularly harmful for the poor segments of New Zealand society.
Low-income households and families spend a substantial share of their income on basic needs: food, rent, and transportation.
Annual food prices were 5.9 percent higher in January 2022 than they were in January 2021. This is the biggest increase since August 2011. The average weekly household cost of renting in the year ended June 2021 was $392.30, up 5.4 percent from year ended June 2020.
Transport prices increased in the year to the December 2021 quarter, up 15 percent. This was mainly influenced by higher prices for petrol, up 30 percent.
Global factors are going to very be important in 2022
Reserve Bank Governor Adrian Orr said on February 25 that “to a significant extent, the recent increase in New Zealand’s consumer price inflation has been driven by global disruptions that have caused sharp price increases for critical commodities and a broad range of imported goods and services”.
Orr has a point. In the year to the December 2021 quarter, tradable goods and services increased 6.9 percent, with higher prices for petrol and food.
Tradable inflation accounts for about 40 percent of New Zealand’s overall inflation.
AUT researchers discuss the increasing pace of tradable inflation in recent quarters and argue that external sources are increasingly fuelling inflationary pressure. I agree.
The role of tradable inflation is going to increase significantly with recent global developments.
Mere hours after Russian forces invaded Ukraine in the early morning of February 24, the price of crude oil rose above $US100 a barrel for the first time since summer 2014.
Oil prices could increase to at least $US125 a barrel if the tensions continue and accelerate. Some argue that soaring energy prices alone could tip the global economy into a recession.
Uncertainty hurts global economic activity
Russia is the world’s sixth largest economy at purchasing power parity after China, the US, India, Japan and Germany, accounting for 3.3 percent of global economy in 2020.
Russia’s exports are largely fossil fuels. Crude oil, petroleum products and natural gas account for nearly half of its total exports.
A recent Bank of Finland Policy Brief presents that the EU, UK and US together accounted for about half of Russia’s goods exports in 2021.
The EU is Russia’s main export market for energy raw materials and aluminium while the UK accounts for nearly all of Russia’s gold exports. The US is an important destination for Russia’s platinum exports, and China is an important export market for sawn wood and crude oil.
The pressure on the price of oil, gas and commodities will increase as the war in Ukraine continues. More disruptions in supply chains and higher shipping costs are on the way. Inflation will rise in many countries simultaneously as the world economy is a connected production hub.
The Reserve Bank’s February Monetary Policy Statement, published before Russia invaded Ukraine, forecasts annual CPI inflation reaching 6.6 percent in the March 2022 quarter.
The ANZ Data Wrap, which was published on February 25, warns that CPI inflation could reach 7 percent in the March 2022 quarter with additional increases in energy prices. The ANZ Business Outlook, which was published just three days later on February 28, discusses that CPI inflation could hit 8 percent.
Uncertainty is widely recognised as having a largely detrimental role on economic activity. Global economic and political uncertainty will rise if the rounds of ceasefire talks do not bring any positive news.
* Dr Ungor declares he has no conflicts of interest.