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Internal inflation from non-tradables is well alight at 2.8% for the last year. In contrast, prices for items traded internationally declined by 0.3%. Understanding these differences and the reasons for these differences lies at the heart of the issue

Internal inflation from non-tradables is well alight at 2.8% for the last year. In contrast, prices for items traded internationally declined by 0.3%. Understanding these differences and the reasons for these differences lies at the heart of the issue

By Keith Woodford

In recent times, the much-repeated mantra from the Reserve Bank has been that inflation is too low. Much of the mainstream media has then spread that message without critical analysis. 

The official mandate from the Government to the Reserve Bank says that the Reserve Bank should aim for a midpoint of two percent inflation per year, but inflation may range in the short-term from one to three percent. The Reserve Bank mandate makes no explicit mention of the tradable versus non-tradable issue, despite the inflation reality that they are two different beasts.

Non-tradables are the items that we produce in New Zealand exclusively for our own consumption and where New Zealand has total control of the pricing. In contrast, tradables are the items where the items can be traded internationally and hence the local prices are determined by international prices. 

Tradables are therefore items that we either import, such as cars, or items that we export, but retaining some for our own use, such as butter.

An example of a non-tradable is local body rates. Another is house rentals. Some others are insurance (all forms), fast food, electricity, legal costs, real estate services and most medical costs excluding pharmaceuticals.

In contrast, further examples of tradables are liquid fuels, clothing, toys, computers and most processed foods.

Some items span both categories. For example, telecommunication costs are 18 percent tradable relating to the equipment which is imported, and 82 percent non-tradable being the local service costs.  Across the overall economy, 60 percent of costs are non-tradables and 40% are tradables.

Here in New Zealand, our overall inflation rate has been driven for all of this century by the 60 percent of items that are classed as non-tradables. The comparison is stark over all timeframes.

For example, for the 20-year period from Q4 (quarter 4) of 2000 through to Q4 of 2020, the prices of non-tradables increased by 84 percent whereas tradables increased by only 49 percent.

Over a ten-year period from Q4 2010, the non-tradables increased in price by 29 percent whereas the tradables increased by only 14 percent.

Over a five-year period from 2015, the non-tradable inflation totalled 14.2% whereas tradable inflation totalled 0.1% - effectively a big zero.

The big message in all of this is that to a large extent our inflation is not imported. Rather, we do it by ourselves. This has been the situation for a very long time but has become even more increasingly the case in the last five years.

In the latest 12 months, the non-tradable inflation totalled 2.8% whereas the preceding year it was 3.1%. The year before that it was 2.7%. For 2021 it is almost certainly on an uptick again with the majority of businesses planning to raise their charges, plus minimum wage rates on the increase.

What these figures would seem to say is that the Reserve Bank efforts to further stimulate inflation are seriously misplaced. We are beating to a different inflation drum than most of the countries we trade with, our internally generated inflation is already well above two percent and nudging three percent, and we now need to find our own pathway.

Whereas tradable inflation has been muted for much of the last 20 years, that may not remain so for ever. One of the key items that may well increase is petrol for private use, which makes up around nine percent of the tradable group and 3.6 percent of total CPI. That is just the petrol for private use. Other items could also start to drift upwards, depending at least to some extent on what happens to the New Zealand exchange rate. 

The fact that inflation of non-tradables has been consistently higher than inflation of tradables raises further questions about the New Zealand economy. As a starting point, it suggests that the non-tradable sector has been less disciplined than it might have been in terms of cost efficiency.

All other things being equal, this higher internally generated inflation relative to internationally determined prices should have led to a decline in the exchange rate, whereas much of the last 10 years has been characterised by high exchange rates.

But all other things have not been equal. New Zealand has been producing products in high global demand – comprising dairy, meat, timber, fruit and seafood – and this has led to particularly high terms of trade. Without those happenings, the New Zealand economy would have been in great difficulty.

Acknowledgement: My search for information on tradables and non-tradables was aided by Jenée Tibshraeny at who came up with the key link as to the components of tradables and non-tradables. This got me on the investigatory journey.  The CPI numbers for tradable and non-tradables, and also the inflation rates for individual components thereof, are available at

*Keith Woodford was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. He can be contacted at

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Thanks. I haven't seen this angle explored before. I'd like to read more analysis of potential consequences from this imbalance between tradable/non-tradable inflation, and perhaps some international comparisons for context.


The issue of tradables versus non-tradables tends to be of particular relevance to NZ given its geographical isolation combined with its small scale. Compared to most other parts of the world, it seems we have more items in the non tradables class. However, for items that are tradable we trade at high levels - exporting primary products in various processed forms, and importing a very large proportion of manufactured goods.

Our RB Governor has been saying recently that what the RB is doing aligns with what the rest of the Western world is doing. My response is that we might need to find our own specific path that reflects the specifics of NZ.

Here is a link looking at tradables versus non-tradables for the USA, but drawing on concepts first developed in NZ.


Good article, thanks for this.

Not like the boffins to make decisions with only part of the data.

Many of the big ticket causes left off the table.


Great article: I could not agree more with the author's statement that "the Reserve Bank efforts to further stimulate inflation are seriously misplaced".
It is time to immediately raise interest rates, gently and now, otherwise the RBNZ will be forced to do it, later on, at a much steeper pace. Non-tradable inflation is already too high, the NZ housing Ponzi is out of control, and the current reckless monetary policy by the RBNZ is misplaced and it must be urgently undone.

Probably too late now (to be 'gentle').
What's coming is going to hurt. It's just a matter of who that is. Those who have assumed the risk today ( the 'haves' if you like)or those who will have it forced on them tomorrow. (the 'have-nots' who are struggling to have anything at all)


This is elephant in the room sort of stuff. Your response Mr Orr?

I've heard that Orr doesn't cope well with being wrong and throws his weight around

It would be possible for this situation to be the case in all countries. Industries producing internationally traded goods benefitting from increases in productivity and efficiency. Not so much for the non tradables.

I agree that this is a possibility, which if correct, would be a strong endorsement of the benefits of free trade. However, I don't think that possibility affects the relevance of the key message that non-tradable inflation, comprising the items where New Zealanders control pricing, is well alight, with this more than a little camouflaged by internationally determined prices.

I guess my point was it may not be "a problem with NZ", it may be more of a worldwide problem with industries that aren't subject to global competition.

It would be interesting to see the breakdown of stats for other countries as you have done here.

Or what the level of inflation is for the different strata of society. My feeling is the bottom half endure much higher inflation than the top half.

Here is an interesting link in relation to applying the same concepts in the USA, which actually draws on the NZ methods of analysis.

Our NZ situation is characterised by the fact that we are a small country in geographical isolation. Although our economy is export focused, we also have a very high proportion of items that are non tradable. The concept of tradables versus non tradable therefore plays out somewhat differently than in places like the USA and Europe. A lot of NZ industries are effectively protected by their isolation.

The OCR has been cut in half five times since July 2008, when it was 8.0% to 0.25% today.

A basket of goods and services that cost $1.00 in quarter 2 of 2008 would have cost $1.21 in quarter 2 of 2020 - compound average annual rate 1.6% - courtesy of RBNZ inflation calculator.

Investing at ocr rate in 2008 you would need $12.50 invested to earn a dollar. Today you would need $400.
Now tell us there is no inflation!
Basic calc but you get the drift.

Fiat currency debasement?

Great article, I assume "Q24" should be Q4, 2020 above?

Petrol (and other dinosaur juice), maybe, but cars are getting more efficient over time. While New Zealand doesn't have fuel economy standard in law the defacto is that the cars we import are sold globally so must meet international efficiency criteria.

My question would be around elasticity. It appears to me consumers typically have a finite amount of money (things ordinary people grasp but economists seem to struggle.) Had they not been spending it on non-tradables would they not just have run out to buy shiny new cars and iPhones? You have only to walk around a major German city to see thay everyone living in their cheap rented apartments has a new Mercedes or VW parked outside.

Yes, 'Q24' should be 'Q4'. My bad. I will get David C to correct.
Keith W

Hence our (undeclared ) desire for immigration, especially short term.

Without immigration, the government of the day would have no option but to introduce health, tax & education reforms, fund universities for outcomes rather than output, plug our infrastructure deficit, support productive investment, incentivise the right skill-mix in our workforce, etc.
Easier to dish out multi-year visas to those willing to study at our low-par institutions or those happy to work for low-pay in our high-cost cities.

The easy option is seldom the best option.

Without Immigration?
How so
Immigration without corresponding infrastructure puts enormous pressure on what already exists

Check out the number of new schools we have built
Despite increasing the population by 1,000,000 since year 2000

Not to mention the impact on the TWI and subsequently FX earnings....its difficult to generate wage inflation when you facilitate an almost bottomless supply of unregulated labour.

If we put interest rates up, the NZD will go up and tradable inflation will go down.
We need to find some inflation mechanism that doesn't cause house prices to increase, possibly by re aligning the CPI basket of goods to what the lower quartile spend their income on. The lower quartile of income earners could be at most rise from price rises.


So for a layman like me - productivity in our export sector makes the country richer. Moving cash around in the QE to property ponzi washing machine devalues our internal purchasing power. Correct me if I'm wrong, but that makes perfect sense.

The next thing that makes perfect sense is government sticking to their knitting on projects that enable people to be productive - health, education and housing. Without those our team of 5 million are too unstable to be tomorrows exporters.

For the last 10 years Exports as a percentage of GDP have fallen despite mass immigration
Remember John Key and Stephen Joyce aspirationally wanted to increase Exports from 29% to 40%
Actual results - Exports have fallen to 25%
So much for aspiration

John Key was naive thinking he could treat being Prime Minister as though he was CEO of NZ. The difference is night and day between the government and corporate environment. Key showed his colours with the flag referendum where he thought he could railroad the process to suit his preferred outcome. That his process would trickle down to the wider public.

But all of this trickle down theory across the board (QE, Markets, Too big to fail, Flag working groups without experts, etc.) has it completely backwards. It's actually trickle up! A large, healthy, happy middle class who are empowered to be the master of their own domains are the economic engine of every great civilisation. The government shouldn't just fear the people, they should empower them.

I am not a John Key fan but the failure of the flag referendum was more to the left hating him rather than the merits of a new flag. The same thing happened when the referendum on a new pension scheme promoted by NZ First was defeated because both the right and left hated Winston. A very similar scheme Kiwisaver now exists. Blind tribalism is unfortunately still with us.

Government of the moment is empowering us alright. If we had changed flag could had made a difference. I think he gave up from that moment.

Iconoclast - Our % of exports to GDP has fallen but our terms of trade have been improving for 20 years, we are a wealthier country in terms of paying our way in the world -

What would the 25% export number be without the improved terms of trade

Shoreman... Are we really wealthier.?
Every year we borrow to maintain our lifestyle .
How much of our exports are not our own..?? ie,. profits go offshore to foreign owners.
We run chronic current acct deficits.

(Warren Buffett offers the analogy of sellings bits of the family farm to make ends meet..)

Looking at things in terms of GDP needs to be done with perspective... ( the components of GDP can change over time and a current acct deficit of 2% today might well be worse than one of 4% a few yrs ago...)

eg. govt spending as a % of gdp has doubled in a few yrs

Too late for that Nation of importers; health, education & housing.. everything are imported there. Their best export to OZ is certainly the Healthcare professionals.

Thanks Keith, a great article.

Logged in to say this is the article of the century. Thanks Keith and Jenée!

Very good article Keith. Question; how much of the non-tradeable inflation impacts the published CPI figures?

I get the impression that through COVID prices in a lot of areas have increased, yet we are being told that the CPI remains low. So is the RBNZ/Government deliberately obfuscating the picture?

another question; why is inflation even necessary? It seems based on a economic fallacy of perpetual growth. But in a finite system that is just slow motion suicide?

Non-tradables comprise 60% of the CPI.
For the last year, 60% of 2.8 % = 1.68%
40% of -0.3% for tradables = -0.23%
Overall CPI therefore equals 1.68 -0.23 = 1.4% (rounded-off to the published figure).
The Stats Dept does their job and provides the data - although they could highlight the tradables versus non-tradables somewhat better. It took quite some searching to find the info that I needed.
The RB uses the overall CPI because that is what their mandate relates to. But they should be highlighting the differences between tradable and non-tradable numbers and what this means, and they are not doing this.
At a political level, I doubt whether the issue of tradables versus non-tradables has come above the horizon. Perhaps the Treasury is saying something to the Minister of Finance, but perhaps not.
None of the political parties are well-endowed with people who understand economics - this became particularly evident at Select Committee meetings just before Christmas. Most of the members of the Select Committee could not even ask intelligent questions.
As for the mainstream media, they are more than a little deficient in exploring matters such as this.

As for the mainstream media, they are more than a little deficient in exploring matters such as this.
Not just this cohort of society.

Here we are yet again staring in the face of another outbreak of QE2 syndrome. The first one, whatever form of stimulus, didn’t work so we’re told to celebrate how it didn’t by welcoming the same ineffective idea done twice (or more). It’s not rational, it’s rationalizing. And it might work well in certain markets, like Western equities, but for workers and the labor market pretty much everywhere it’s a repugnant and harmful sideshow.

For one thing, these central bankers have no idea how QE’s supposed to work, either! I’m not making this up. I already wrote about Bill Dudley’s 2014 testimony to that effect.

Here’s a recent study published by the Federal Reserve about the Fed’s infatuation with the Effective Lower Bound (ELB) and thus QE’s role in circumventing it especially when this ELB is down close to the ZLB (Zero Lower Bound). Published at the end of August concurrent with the updated inflation targeting nonsense, author Michael Kiley sums QE up this way:

"Within the DSGE model, QE stabilizes markets through relaxation of financial constraints facing financial intermediaries, in a manner akin to the mechanisms that appear to have motivated Federal Reserve actions."

Catch that? That second clause is a doozy, a true beauty of a dodge. How does QE work? What Kiley is saying is that they don’t really know, but QE just fixes whatever is wrong; “in a manner akin to the mechanisms that appear to have motivated Federal Reserve actions.”

In his words, something happens in financial markets unleashing “financial constraints” on financial intermediaries, provoking the Federal Reserve to respond with QE, and whatever that something is QE just magically focuses on “the mechanisms” that have gone wrong and takes care of them freeing up the financial intermediaries to keep feeding credit to productive economic investment (the macro association DSGE models associate with financial markets and intermediaries).

That’s some serious deus ex machina right here. Link

murray 86,
I forgot to answer your question about whether inflation is necessary.
My own belief is that it is not at all necessary and that it leads inevitably to economic distortion. This is even more the case when it leads to real (inflation adjusted) interest rates being negative, which is what we have here in New Zealand, with this being even further exacerbated when tax is levied on nominal interest rates.
However, our RB Governor has made it very clear that he will go to great lengths to prevent any deflation.
A very long time ago it was demonstrated that countries experiencing economic growth tend to also experience inflation. Somehow that has got twisted around through reversal of causation to create the mantra that inflation will stimulate real growth.
Keith W

Wow Keith - you're sounding positively Austrian in that economic analysis.

I don't think I fit neatly into any of the leading economic schools of thought, be that Austrian, Keynesian, monetarist, behavioural or other. But I do try and understand what each school brings to issues. I tend to look at economics as the aggregate output of individual decisions where those behaviours depend on time and place. So I go wherever the evidence seems to be taking me based, I always hope, on logical analysis. I have used models throughout my career both in economics and science as an aid to understand systems, but with models I am always looking for hidden assumptions. I like the saying of English statistician George Box that "all models are wrong but some are useful". In a changing world I think we are all learners. Unfortunately, some supposed experts think they already know it all. In that context I like a sign that a scientist colleague of mine used to have outside his door at Queensland University: 'In God we trust; everyone else must bring evidence". One of the particular challenges of econometric models beloved by both RB and Treasury folk is that they are built on historical behaviours from another time.

Thank you Keith. I asked this question on this forum a couple of years ago and got some interesting responses. Yours however validates my own opinion.

I don't necessarily think deflation is a bad thing either, as it returns prices to a more affordable level, but then resources are a factor then. It really is a very complex picture. Where a localised excessive inflation has occurred (housing), then how can deflation in this area be a bad thing, so long as it is controlled and managed?

As I understand it, the RB Governor thinks that if there was deflation then we would all decide to stop spending because the items would be cheaper in future. And he thinks this would be very bad for the economy and employment. However, when I test this against my own behaviours, I do not believe I would hold off making purchases on anything just because I thought it likely the price might drop one or two percent in the next year. I agree that if the economy tanked, then prices might decline, but I don't think that a minor decline in prices would be the cause of the economy tanking. That would be reverse causation. I think we are all wired so that if we want it we want it now. On occasions we will hold off on the purchase of an item if we think there will be a forthcoming sale, but that is only for major discounts.
In the case of housing deflation, a major deflation would indeed be painful. Perhaps the RB should have thought about that some more before the current pumping.

If it is true that the RBNZ Governor holds this view then he is not the appropriate person for the job. Technology advances and globalisation have led to a new paradigm where goods are more freely trade around the World. Money is not scarce and interest rates are low. Wages in NZ have not grown substantially. The asset bubbles we have are the result of the central banks QE and OCR policies and any deflation from the bursting bubble is on their head.
Love your articles Keith, hope you are advising Govt on such matters.

the problem with deflation is the debt ratio....and when you are at zero interest rates you have no where to go.

Yes, large scale house deflation (loss of value) will increase the debt ratio. But the house price deflation is very different to CPI deflation.
In the same way that house prices have been inflated by artificially low interest rates, then any significant increase in interest rates will move house prices in the other direction.

The concern is not just house price deflation (though in terms of the RBNZ bank stability its certainly front of mind) rather the greatest concern is GDP deflation (recession) and its impact on all debt ratios, including govt debt to GDP and the consequences of such.

Deflation and recession should not be treated as synonyms

Synonyms no but one cannot occur without the other....however if you prefer the greatest concern is a decline in prices and (especially) wages.....its a question of degree and duration....when does a recession become a depression? when the the negative impacts become self reinforcing

That is why any deflation that is necessary (and I believe in the housing market, it is) then it should be managed. But there will always be a few who get burnt. I have suggested in prior forums on this site that FHB's could be protected, but all others need to shoulder their risks themselves.

I believe deflation is required in the housing market as there is no way wages can rise to the level required to make houses affordable to ordinary kiwis. I firmly believe a basic house should cost no more than 3 - 6 times the median wage. I also believe building more houses will not achieve this as wealthy investors will snap them up to protect their own capital values. The RBNZ's concern about bank stability - well they told us when they carried out the stress testing of banks that they could withstand house prices falling by as much as 50% without too much issue. Either this was an accurate statement meaning they are essentially lying to us now, or they lied to us then. There needs to be some accountability over this.

While i agree that it is impossible to restore affordability ratios through increased wages there are real risks in reducing house prices.....nobody has gently deflated a speculative bubble before and the contagion risk to the wider economy creating exactly the situation outlined above is very real...i.e. falling wages and unserviceable debt ratios and no way out as interest rates are already effectively zero....but having said that ultimately the bubble will burst as never ending support is impossible so we should at least try a managed decline.

How can you possibly get a true measure of inflation when your not using the right variables ? Perhaps they should fix this first and then maybe we wouldn't be in this mess in the first place.


One of the reasons I subscribe to this site is to read great articles like this. My Herald subscription renews soon and I am not going to bother as the MSM reporting and analysis is just so woefully superficial. I just shake my head at how disconnected from reality RBNZ and Robertson are. Absolutely no thought for our younger generations economic welfare, except the state will provide, subsidised by anyone left that's productive.


Here here. Probably a good reminder for everyone to donate using the blue bar at the top. Quality journalism is gold.


Even if I do disagree at times with some articles publish here, I enjoy the different perspectives everyone has and the variety of subjects covered. It challenges your own beliefs and opinions, and ,on occasion, manages to change my stance on a topic. Quality site

That's what I love so much about htis site, the constructive, rational discussion that goes on in the comments section. I sometimes pay more attention to that then the article :P
Great range of people without the bottom feeding trouble makers and trolls that you get on facebook etc.

Nice article.

Tradable has depended largely on what happens in China. China had 30 years of aggressive industrial expansion, we had 30 years of low tradable inflation. But there are real signs that China has reached the end of its easy expansion period, so what happens next is a set of interesting times.


Really useful piece - concise and insightful, particularly when read alongside the info released this week on impacts of inflation by income quartile.

What all of this says to me is that the old world view of measuring and managing inflation as a single indicator and then thinking you can control it by tugging on the single OCR lever is dead in the water. Understanding and responding to the threat of inflation requires deeper thinking and analysis - where in the economy is inflation happening, is it temporary or 'real', what is the cause, what should we do about it?

Yep. I think an increasing number of people are becoming aware of what a blunt instrument CPI is, and its alarming deficiencies given that it drives RB policy. It's a bit like measuring the prosperity of a nation solely by looking at headline GDP without considering unemployment, quality of life, inequality or anything else...

Could be a lesson for RB, to be more creative - positive unpredictable, rather than relying on the 'mandate given' - RBNZ is one for sure, unable to use even the current blatant tools in creative, just, unpredictable - but after all, most of them coming from the current OZ banking exploits for NZ.

For the benefit of the 40% of the NZ population born overseas
This is how we got into this situation
The Big mistakes Government made
Your help is needed

Looking through some old business files the other day and found a letter from my bank dated from 1987. They were pleased to inform me that my current interest rate of 24.5% was going to be reduced to 23.25%!!. Am going to frame it as the younger generation just do not believe you. Those were the days where farming was being projected as a sunset industry, tourism was going to be the sunrise industry and Roger Douglas was spouting off that NZ was going to be the Switzerland of the south pacific. How did that all work out. Can we ever trust politicians to do the right thing.

Pre Rogernomics one had to go cap in hand to the Reserve Bank to get overseas funds. Do you really want to go back to the pre-1984 days?

Can’t wait to see Jenee throw this one at mr Orr ible.

Agree the CPI is at best, badly weighted. The cynic in me thinks we have been deliberately mislead about inflation so they can create more debt.

Nothing cynical about it, thats exactly what is happening. Notice how anything you may strive to want in life (luxury items etc) have 10-20% inflation rates, but are not included in the CPI basket at all...When you can pick and choose your CPI basket composition its just a load of ****.

And house prices (hardly a luxury) aren't included, only rent and construction cost inflation.
What a crock that is!!!

Great article Keith.

Local body rates are probably the most intractable source of non- tradeable inflation. And what will happen to them when their three waters chickens come home to roost?

Off the top of my head, drivers of non-tradeable inflation;
-Rates (to accelerate as infrastructure maintenance deficits continue coming home to roost)
-Within the longer timeframes annual leave going from 3 weeks to 4 weeks
-Minimum wage increases
-Compliance compliance compliance and certification and auditing thereof.
-Health and Safety requirements

So not all of these bad things per se. But yes, distortions follow.....

Deflation may be much worse. Tradables and non-tradables are highly integrated. The former is a function of the latter.

Tell me CWBW if there was an expected deflation of 10% in the next year how would it change your buying habits? Food, petrol to get to work, rates, insurance, rent etc can’t delay buying those. The washing machine is broken, you’re still likely to replace it. It only truly effects the big ticket items, house and cars.

I'll buy less on everything that can be postponed- tomorrow will be cheaper. Workers providing me with the goods will have their wages depressed. Heck, I'll use my sister's washing machine while waiting for the price of that top line machine to fall and when tomorrow comes, I'll wait some more for a deeper discount. Classic economics- it affects all sectors of the economy.

It's the non-tradables that have the biggest impact on most people's financial situation, especially things like insurance and rates which always go up by far more than the CPI. Yet the RB clings to the mantra that inflation is really low. The RB's blinkered academic approach to decision making (I know, they are all economists aren't they so what can you expect) without considering factors unique to New Zealand continues to take us into dangerous territory. Just sack Adorr and the rest at the top and start again.

Really great, admirable article as usual Keith. Thumbs up!
But one must realised where most of RBNZ team/leader coming from - If you're the govt. yes, surely you can choose scientist, doctor, people with right qualification to listen to, but choosing for RBNZ team/leader? - how many top economist academia there? - at least the one that counter the balance of decision, hardly.. huh.
I vote anytime straight away for Keith to be in the RBNZ, or at least the likes mindset to be given input think tank for consideration. But, sadly don't expect too much there.

Pretty sure this means we are simply borrowing more in NZ. Like it doesn't necessitate costs are out of control, it could well mean borrowing is out of control.