By Bernard Hickey
It's as if the New Zealand economy has just been overseas on holiday and has received a giant bill through the mail for the mobile phone charges accidentally racked up because it left its mobile on.
The telecommunications industry describes this phenomenon as 'bill shock'.
Upon receiving the bill, the customer then promptly cancels their phone subscription and stops using their phone. It's as if they're afraid to use their phone again.
Over the last six months New Zealand has just received an economy-wide 'bill shock.'
As if out of the blue, prices for many everyday items just went up. It may not be reflected in the inflation figures yet, but consumers are reeling from the impact.
It's the feeling someone gets when they see the price of petrol has risen over NZ$2.15/litre, but it doesn't really register until the price to fill the tank jumps over NZ$100 a tank. It's the feeling you get when you haven't bought a particular brand of bread or milk or coffee and suddenly it costs a NZ$1 more.
That 'bill shock' feeling hit me when I noticed my morning cup of coffee had suddenly increased from NZ$3.50 to NZ$4. That's a 14% increase overnight. The cafe explained that it hadn't increased the price for a while and the costs of coffee and milk had increased. I was told a 10 cent or 20 cent increase made no sense for cash buyers so it was simply increased to a nice round figure of NZ$4.
Conventional economics would tell you that such a price increase would slide me out along the demand curve so that instead of buying 5 cups of coffeee a week for a cost of NZ$17.5 I would instead buy 4 cups for $16 and have a day off.
But that's not how I reacted.
I simply stopped buying coffee from the cafe. Now I drink instant coffee,. The shock of the big jump rather than dribbly, little increase forced me to re-evaluate my spending on this 'luxury' altogether. The combination of the higher coffee price and the cost of a tank of petrol going over NZ$100 was my personal bill shock.
But I'm not the only one.
The GST increase in October increased the sensitivity of many consumers, but it is the price increases in February and March that have chilled the air around wallets. The earthquake in Canterbury has snap frozen the willingness of many to spend on anything non-essential.
Consumer confidence figures out this week showed a slump to levels not seen since the Global Financial Crisis of late 2008 and early 2009. See our article on consumer confidence here.
Many realise prices are about to go up again. Prime Minister John Key has already warned that the EQC levy will triple to NZ$180 per insurance policy. Construction costs are expected to surge after the earthquake.
Rents, levies to rise
Rents for both the most in-demand residential areas and commercial property are also expected to rise, particularly in those areas where supply is already short and Christchurch businesses and families are relocating.
This will increase the pressure on retailers and any 'domestic' businesses that sell products or services not seen as essential. Many households who are already repaying debt early are likely to simply keep their existing mortgage repayments at the 'old' higher interest rates to increase their repayment,.
That will be good in the long run as debt is repaid and the vulnerability of NZ Inc to another freeze on financial markets is reduced.
New Zealand is learning all about inflation again. At the moment it is at levels where people are sitting on their hands.
The more dangerous level is if inflation vaults beyond 5% towards 10%. No one is suggesting that will happen yet, unless the explosion in the oil price accelerates and the inflation fires in emerging economies such as China and India spread to the developed world.
But if it does, all bets are off. It then may make sense for consumers to spend the money they have now and let inflation reduce the value of their debts. That would be a deeply unsettling and different type of bill shock for savers and banks. One New Zealand has not seen since the 1980s.
See our interactive chart on consumer confidence below
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.