Brian Fallow argues as NZ businesses battle higher fuel costs, they ought to be mindful of who their customers are and how able and willing they are to have price increases passed on to them

By Brian Fallow*

People old enough to remember the oil shocks of the 1970s may be forgiven if a dismal sense of deja-vu assails them.

It would be misplaced. In one respect the current crisis is worse, because it is broader. 

It is not only oil supplies that are disrupted. Liquified natural gas, urea, aluminium, and the helium essential to the manufacture of microchips are too.

But what is better this time is the monetary policy regime that was put in place to deal to the chronic, brutal inflation that followed the shocks of the 1970s. We all owe Don Brash a debt of gratitude for that achievement.

Trouble is, the credibility of that regime has suffered considerable wear and tear in recent years. Over the past six years, since Covid arrived, the consumers price index has grown at an average annual rate of 4.1 per cent. That is hardly price stability.

Fortunately wages have grown faster. Average weekly earnings have increased at a compound annual growth rate of 5.2 per cent so the rise in real wages has averaged 1.1 per cent a year.

But note the past tense. The Treasury in its half-year update in December reckoned real wage growth by that measure would be negative in the current year, and then rise -- assuming an optimistic CPI inflation rate of 2 per cent -- by just 0.5, 0.6 and 0.7 per cent a year in the out years.

Throw in some bracket creep on the tax side and higher KiwiSaver contributions, and the Treasury's outlook for wage-earners' real disposable income growth was basically zero.

And that was before the shock emanating from a feckless fool's "excursion" to the Gulf.

This is something the people who set prices in New Zealand's 600,000 or so enterprises need to bear in mind when they contemplate the hit to their margins from higher fuel costs.

The transmission from higher global oil prices to New Zealand consumer prices is not automatic. Our businesses have some agency.

They need to be mindful of who their customers are and how able and willing they are to absorb those increases. The risk is that higher selling prices are offset by lower volumes and revenues.

Then there is the fact that the Reserve Bank reckons we have a negative output gap -- a measure of spare capacity in the economy -- of 1.5 per cent of gross domestic product. How much of that spare capacity is at a competitor's disposal?

So it is a unenviable position for both households and businesses.

*Brian Fallow is a former long serving economics editor at The NZ Herald.