Stuff: Excess profits and lack of competition play role in inflation story
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Every good political narrative needs a villain: otherwise how do you create a sense of crisis, or present your own idea as the solution? And so it is with our hugely inflated cost of living. The National Party already has an evildoer in its sights: the government’s supposedly wasteful spending. Some commentators see a looming threat from workers whose wage demands could push inflation still higher. But are these really the right villains?
We can, for a start, take Labour out of the police line-up. It’s hardly Grant Robertson’s fault the cost of bringing a 20ft shipping container here from Shanghai has gone up tenfold, from US$500 pre-pandemic to US$5000 last September.
Nor did he launch the war in Ukraine that has caused the biggest commodity price spike in half a century, while sending oil prices soaring. And although inflation may be 5.9 per cent here, it’s also 6.2 per cent in Britain, under a Conservative government, and 7.5 per cent in the States. It’s everywhere.
Examined closely, official figures show nearly four-fifths of our current inflation occurs in three sectors: transport (mostly oil, plus second-hand vehicles); food (especially fruit and vegetables); and housing (rising construction costs and rents). Very few of those increased costs relate to public spending or regulation.
As to the supposedly “massive” $6bn in new spending Robertson will announce in May’s Budget, we mustn’t forget that the government already buys $110bn-worth of goods and services each year, and the price of those items is rising. Easily half the $6bn could be taken up just maintaining government agencies’ purchasing power: it’s a reaction to inflation, not a cause of it. And given the state of our water pipes and social housing, we need – if anything – to be investing more, not less.
Countering inflation is of course a core role of the Reserve Bank, which will presumably keep raising interest rates to dampen down demand. Politically, though, Robertson can’t just sit idle on an issue rapidly dominating public debate.
In the short term, the best he can do is ease inflation’s impact on the poorest. Inflation can actually be redistributive, because it erodes savings (largely held by the well-off) and makes it easier for governments to pay off debts (their tax take goes up as wages and prices rise, while the dollar amount of debt stays the same).
But that’s true only if the lowest earners have their purchasing power protected – rather than taking the biggest hit, as they are currently. Halving public transport fares was a sensible temporary step. It should be made permanent, and planned benefit and minimum-wage increases should at the very least be maintained.
Currently, there is little danger of such increases creating a wage-prices spiral (in which rising prices drive up salary demands, which in turn raises prices, and so on), if only because New Zealand’s sparsely unionised workforce won’t mount sufficient pressure. (This is especially true if ordinary people, like the Treasury, expect 5.9 per cent inflation to be a blip, not the new normal.) Official estimates, meanwhile, suggest the upcoming minimum-wage hike will add just 0.12 per cent to inflation.
Rather than blaming salary earners, we might look at business owners. Some overseas economists believe excess profits, especially in uncompetitive industries, are a key inflationary force. Cartels find it easy to hike prices, and keep them high: where, after all, will the consumer go? US president Joe Biden certainly thinks it’s a problem.
Domestically, many of our bars and restaurants may be struggling – but overall, firms report higher profits, and more cash in the bank, than they did before the pandemic.
Recall the main sectors causing inflation: food, transport, housing. Food retailing is dominated by a supermarket duopoly that, according to the Commerce Commission, rakes in $1 million of excessive profits every day.
Fuel retailing is not as competitive as it should be. Markets for housing materials, which cost 20-30 per cent more here than in Australia, are riddled with cartels. Electricity generation, meanwhile, is run by a handful of firms. The government’s aim, in all these sectors, should be to inject greater competition, curb excess profits, and keep costs down.
Here’s another thought: in the wake of Covid, supply-chain chaos, and the West’s now-unwanted interdependence with Russia, other governments are rethinking globalisation and mass importing – so why not ours? Buying things overseas may often be cheaper than making them here. But if more domestic production, in a few strategic areas, gave us extra resilience, and insurance against huge supply-chain cost increases, it might start to make economic sense.
Any such moves would take time. But then the Treasury’s forecasts might be wrong: high inflation could be a lasting phenomenon. We also need protection against future inflation shocks. And lastly, though least importantly, such action would give Robertson the appearance of doing something. Because that, too, is a question of political narrative.