Treasury is forecasting New Zealand’s inflation “worst case scenario” at 3.7%, as the war in Iran drags on and fuel prices continue climbing.
Finance Minister Nicola Willis briefed journalists from her office on Monday afternoon and said Treasury was forecasting inflation rising higher this year than anticipated.
Willis said the worst case scenario, “which is for a prolonged conflict with oil prices continuing to go higher than they are - that is a conflict potentially lasting through the rest of this year”, was 3.7%.
“That's too high for my liking, but it's lower than Australia has today. They are currently at 3.8%.”
Willis also revealed a “timely, temporary and targeted” response to high fuel prices would be considered, should the Government consider prices were raised to a point that was putting acute cost of living pressures on households.
Willis said the situation was difficult for forecasters. “They're not just trying to forecast what would the economic impact of particular events or price spikes be, they're also trying to anticipate what those very events might be”.
“And so even that number that I share with you is somewhat dated, and that it was a figure that the Treasury put together some days ago, and a lot has happened in the world since then.
“But what they did do as a scenario was… in a worst case scenario where you have a prolonged conflict, you see the oil price going as high as US$185 a barrel, you see a very significant impact on global growth and output, how might we see that flow through to the New Zealand economy?”
“I'd note that there was also a scenario that they gave me in which they thought inflation would only get to 3.2%, still out of band, but not nearly as high.”
The most recent Consumers Price Index rate from Statistics NZ, for the December quarter, showed annual inflation of 3.1%.
Willis said forecasters still expected the New Zealand economy to grow strongly this year.
"The lowest rate of growth that they forecast in the scenarios they shared with me was 2.5% - that is a healthier rate of growth than we experienced last year," Willis says.
54 Comments
Treasury: "what number do you want it to be?...
"Slightly less than the Aussies please"
Seems unlikely that that is the worst case. The worst case is that everyone starts raising prices because everyone else is. If the RBNZ does nothing again (e.g. its transitory) I can't see any reason we wouldn't see 7% inflation again.
Why bother modelling something when we just saw the worst case scenario a few years back (and who's to say it couldn't be even worse).
Remember that the OCR is currently at a fairly stimulatory setting below neutral. They are stimulating the economy at the same time fuel prices are going through the roof, yet treasury thinks there's nothing to see here.
Willis also revealed a “timely, temporary and targeted” response to high fuel prices would be considered, should the Government consider prices were raised to a point that was putting acute cost of living pressures on households.
As I said yesterday, if you're worried about inflation, then a government response would be the better thing to do at this point in time rather than relying on an OCR change which would take far too long to have any effect. Whether they do it remains to be seen. I agree though that 3.7% is lower than the worst-case scenario I would think.
"Oh crap we haven't got enough fuel"
"Let's make it cheaper, that should fix the problem"
Demand for fuel is price-inelastic in the short-term. The challenge here is stopping diesel prices driving up the price of everything else. A simple tax credits model for importers could have done the job. It's not like we didn't know that we would get another oil price shock.
That makes little sense. Supposedly most the country can’t afford the cost of living, yet they’ll still drive wherever they feel like it regardless of the price of fuel?
You have to drive to work, if you cannot take the bus.
you do not have to drive to the mall
There's loads of studies on this and lots of good data. Changes in demand from higher prices are very minor over months.
It's not like we didn't know that we would get another oil price shock.
Just as it isn't as if we didn't know the gas in NZ was running out....10 years in advance by the govt. Humans are very poor planners in aggregate aren't we.
Don't see it as the worst case either. Main reason is the word is already spreading about inflation so retailers will increase prices just because that's what everyone is expecting.
Many of the freight companies were quick to go from monthly fuel adjustment factor revisions to weekly once the fuel prices started moving. Those costs will flow through very quickly to retail prices.
I'm calling bullshit on this.
According to AI: "as of the December 2024 quarter, petrol makes up about 4 percent of the New Zealand Consumers Price Index (CPI) basket".
Petrol has gone up about 25% already, so 25% * 4% = 1%. A 1% increase in CPI from petrol alone to 4.1%, and that is assuming petrol stays around $3 a litre. This excludes any of the flow on effects and the other increases to transport costs (diesel).
Correct me if I'm wrong, a basic analysis I know.
Consumers consume directly about 59% of the petrol that is imported - according to AI.
That direct consumption is where the 4% of the CPI basket comes from.
Then there is the remaining 41% of petrol that also goes into the CPI via its effect on manufactured goods.
Then there are the effects on diesel and aviation fuel.
Exchange rates are also part of the overall equation.
And diesel doesn’t have a fixed tax component, so if petrols gone up 25% diesel probably more like 50%. So CPI at least 5% if petrol stays at $3 a litre. And surely that’s not the worst case scenario, we will probably see worse next week!
Yes but as we all know it becomes embedded in nearly everything else we consume as each part of the manufacturing and supply chain gets impacted with rising input costs.
Exactly, so CPI at 4.1% just from the price at the pump that the average household consumes, surely at least 5% with it embedded in other costs.
Then it can also cause spiralling inflation. People will demand pay increases, especially the likes of teachers, firefighters, etc. Businesses will take this opportunity to raise their prices even if they aren’t affected by fuel costs.
I’d like to see treasury’s maths. I feel like they forgot to carry the 1.
It gets into everything - because as the prices of fuel and everything else rises, people demand more wages from their bosses to pay their bills, which forces the accountants doing the pricing to increase costs of goods and services they also sell so they can maintain their profit margin (or at least breakeven). And the spiral starts.
Why we were so stupid during COVID not to act faster to prevent that spiral from starting - because once it does, it takes years to get back under control.
COVID was always going to have a years long tail. It's still a problem for us now.
Yes but as we all know it becomes embedded in nearly everything else we consume
Yes and I foresee many businesses seeing this as a prime opportunity to crank prices over and above the increase in input costs, and implement shrinkflation once again to cream the margins as they did 2020-2022.
No, you're right. Petrol is 3.5% of the basket but add in diesel and engine oils etc and you get to just over 7%.
So, if all of the above goes up 25% and stays up for the quarter, then that's 1.75 percentage points added to annual CPI.
The propogation through other prices will add to this - noting that a similar sustained rise in 2011 drove CPI above 5%.
So are treasury blatantly lying? Or do they think the worst case is $2.70 a litre or something?
I think they are estimating that the price will be up for a few weeks rather than a few months, so the average for the quarter will be a lot lower. I think they are being super optimistic!
So its the worst case assuming the problem is resolved soon. The worst of the best case.
Exactly. Pure hopium in my view.
Yes, you're wrong.
And wrong a long way back in your thinking.
Interesting cherry-pick, BTW... standard spin method, as previously mentioned...
There is NOTHING delivered, produced, consumed or ejected by this society, which would have happen ex fossil energy. Food definitely included. And payments are somewhere between monthly and instant.
Back during the GFC, Goodman Sachs predicted - as others are doing now - $200 barrel oil. I thoughtso too, then. Then I studied the religion that is economics, to which I applied physics, and realised that you cannot support such a number (ex rampant inflation). And the possible window is closing, thanks to lower EROEI fossil stocks (remaining; we've burned the best), thanks to even-more-scattered resources, thanks to entropy and thanks to competition - including war over 'what's left'.
But here we have a nation, a government and a media - to say nothing of shills - obsessed with money, to the point they seem to think it is fungible. Good luck with putting it in your tank. We have been 'paying' far too little for energy and as a consequence, far too little for everything else. And taking that as 'normal'. It wasn't.
Why does this sound so familiar? "forecasters still expected the New Zealand economy to grow strongly this year". Expectations based on misunderstand the real-world operations of a fiat based economy. There is also no consideration given to private sector debt cycles.
I found it interesting that people think that importing inflation isn't the RBNZ's job to handle - that it should be subsidised by the tax payer so that companies don't fail with higher input costs.
But when we spent 30 years importing deflation from cheap foreign labour that decimated our manufacturing and production bases (killing off many many companies, trades, jobs...), then it was absolutely the RBNZ's job to raise aggregate demand via cheaper mortgage lending to stop a deflationary spiral occurring.
Why didn't we protect our businesses from the deflationary forces of globalisation so that we could have kept jobs and companies here (instead of giving the work to people in China or Vietnam) - while preventing our private debt from skyrocketing by limiting interest rate falls?
All we have done for 3 decades is traded jobs (productivity) for higher private debt. "Here Vietnam, you make this thing for us cheaper so that the CPI falls, so that we drop interest rates, so that we can get a bigger mortgage and pump house prices, while we simulatenously lay off workers and kill businesses in NZ who would have originally made the same product". Economic suicide and stupidity in my opinion.
(likely a controversial take, but I'm trying to fathom the extent of our self destruction/economic stupidity from the 1990's to now).
The simplest way to understand it is governments would rather use debt to gloss over the fact that our labour is priced out of the market, than to allow the sort of destruction that'd rationalize that.
And then we can all think there's some sort of miracle proprietary productivity booster to make up for the labour cost disparity.
The US did just that, and it put Trump in the Whitehouse
on the promise that he'd eject the lower-priced labour the whole country had based it's assumption on.
What do you think the OCR should be IO and how long do you think it will take to have an effect on the rising fuel prices and good/services those higher fuel costs will flow through to? You make arguments against the high private debt we have in this country so wouldn't it be better to have the government subsidise the fuel to keep prices steady(er) for the short term until the Strait reopens? It'll prevent rising costs a hell of a lot faster than an OCR rise will. As said earlier, this isn't a long term trend that needs to be acted on which is where your argument is relevant. It's a short term (hopefully) spike that needs a govt intervention. Sorry to say but I detect a bit of schadenfreude from you so that you can be proven right after all these years.
"You expect the RBNZ to make a bad decision now because it's made bad decisions in the past?"
Of course. A leopard doesn't change its spots. Do you expect a fool to suddenly act with wisdom?
Sounds like you're advocating for the fool??
Negative ghostrider - I believe in the proverb that 'He who is glad at calamity shall not be unpunished'. So no schadenfreude.
Perhaps it is those who have been glad at our expending private debt (up above 100% of our GDP) and destruction of our local companies, jobs, and trades (ie the policies of the past 30 years) that should be wary.
The solution to our problem is lower private debt to GDP. You either fix this by reducing the debt level, or improving GDP, or both. Keeping interest rates low when inflation is rising means that the RBNZ only exists to drop rates when we import deflation, but to never raise rates when we import inflation (how crazy is that?).
You don't pretend it is not a problem - as its the elephant in the room everyone is avoiding talking about and yet it is creating a mess of everything else around it. eg we can't raise rates because we are afraid people will default on loans (because they have too much debt relative to our productivity).
Eventaully you actually have to address the core problem we have - not just tiptoe around it and pretend it isn't there. Denial isn't a solution.
I think theres two diffrerent issues being mixed up here. High private debt is a structural problem that needs regulatory and house policy changes.
The current discussion is about an oil price shock and raising the ocr aint gonna reduce global fuel prices, all it will do is raise mortgage costs and risk slowing the economy more, when higher fuel prices are already doing that job, and central banks generally look through shocks like this for exactly that reason.
The rbnz also clearly does raise rates when inflation rises, as we all know ocr went from 0.25% to 5.5% in the last round, which was one of the fastest tightening periods ever
Interesting perspective. Consider however that if our housing never got so overpriced, the level of private debt would be lower and we would have more resilience to this current shock, as with lower mortgage debt, comes greater disposable income, and lesser impact of rising mortgage interest rates. The result being that households have greater ability to absorb the increase in goods and services, continue spending, less job losses and thus lower benefit payouts by govt.
The solution to our problem is lower private debt to GDP. You either fix this by reducing the debt level, or improving GDP, or both
In a closed economy (or one with a roughly balanced external account), sustained government deficits that are used to support private incomes can allow households and firms to run surpluses and pay down debt. Under those conditions, rising public debt is the mirror of rising net private financial wealth, and private leverage ratios can fall even as govt debt‑to‑GDP rises. Many stock‑flow consistent models explicitly show paths where higher govt spending and deficits stabilize or lower private debt ratios by replacing credit‑fuelled demand with income‑funded demand.
Yeh dunno might work in a closed economy I guess, but nz has run account deficits for decades. So most of our private debt growth has come from mortgages funded offshore thru the banks, so govt deficits dont necessarily mean households deleverage at this point. And anyway thats more a housing credit structure thing, which is separate from whether raising the ocr fixes oil prices thats happenig now
The only risk in increasing fiscal spending is that is exacerbates any inflationary problems you already have. So increasing government debt to GDP, in order to try and reduce private debt to GDP, might just see more inflationary show up in the economy (as it increases aggregate demand) - which in turn could cause interest rates to need to go even higher than with stable government deb to GDP.
Basically (in my opinion..) you dig yourself into a deep pit doing what we've done with out private debt levels - you become extremely vulnerable to any external inflationary shocks. Better to prevent this situation before it occurs than to try and fix it - but instead we had a head of the RBNZ giving banks interest free money to pass on to NZ'er in the form of more private debt to 'stimulate the economy' via the 'wealth effect' only a few years ago (and they called in an 'investment in the country' instead of what it really was - a poisoned chalice - not a gift to the country).
Pretty crazy really.
yes we could reduce private debt by forcing liquidation of bad investment, but that is touchy for national.
The risk being that it starts the panic stage of the cycle and the rush to the exit plunges the country into a large depression.
No one is disputing any of that but this whole debate was centred around JJ's hypothetical around fuel supply or a lack there of. And you still refuse to answer the question above around how an OCR hike would fix that and the flow on effects from it in the immediate future. Continuing to repeat yourself as you've been doing for a while doesn't address what we've been talking about.
As Jesus said, people have eyes but they fail to see. I've been answering your question each time, but you don't want to see my answer!
The OCR hike reduces aggregate demand - yes it will be destructive to the economy in the short term and it will hurt, but it will only hurt because our private debt to GDP levels are so high. If our private debt was not so high, it would not be an issue. If inflation becomes embedded in the economy, then that will hurt even more than higher short term interest rates! So why not just sort out our private debt issue so we don't have to keep coming back to this problem?
Also note, raising rates could actually be highly beneficial to the longer term prospects of the economy. It encourages saving, which is future investment. Also many of the people I've discussed this with over the past 5 years have > $500K in savings. When term deposit rates go up, they spend more, not less. They actually tighten their wallets when interest rates go down, not up, as the return on their savings reduces. For them, higher rates is good news, not bad.
But we seem to want to only frame these issues through the lens of the person with > $500K in debt, not savings. Why? Does every decision have to prioritise the highly leveraged individual, not the prudent saver?
Presumably there's a lot more fiscal activity introducing new money via debt than just giving someone a greater return on money they already have.
"Willis said the worst case scenario, “which is for a prolonged conflict with oil prices continuing to go higher than they are - that is a conflict potentially lasting through the rest of this year”, was 3.7%"
That is either naive or stupid...or possibly both.
The worst case scenario is zero refined fuels available in NZ....think about it.
Well, the worst case scenario is thermonuclear war.
But if there was no fuel..... Then no amount of preparation would likely have the country prepared.
Possibly...but if the 'worst case scenario' our leaders are planning for is 3.7% inflation then they are not planning at all.
Most of these institutions are still applying linear logic to economic forecasting. It assumes yesterday's status quo continues in perpetuity.
My guess, is if things get bad enough, we'll see some of that lovely Keynesian spending on self sufficiency efforts.
I'm not sure (modern) war is sustainable without fuel, so there's that
Their rations generally run out long after the general publics.
Well, the worst case scenario is thermonuclear war.
But if there was no fuel..... Then no amount of preparation would likely have the country prepared.
which is why it was so dumb to shutter marsden, could also be volcanic winter, impact etc etc etc
if you need fuel shutting down your refinery is dumb dumb dumb
Look, it's simple.
So long as we don't extract or refine fossil fuels, and instead import them
No harm done.
Wow, the lowest predicted economic growth rate is 2.5%. The latest services sector data is just an inconvenient truth. The government thinks they can spin there way to a growing economy.
Correction: They can't rely on asset price inflation to do it for them for once in the last 35 years and they are out of new ideas, still relying on old ones that are outdated.
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.