The price of everything is set to rise

Photoshopped image credit: Technomage

Stuff reports: quote:

A “perfect storm” of minimum wage rises, a weak dollar and higher fuel costs are predicted to combine to hike prices.

Prime Minister Jacinda Ardern has come under heat this week over record fuel prices. But economists warn there may be more pain on the horizon.

Cameron Bagrie said the current situation could be described as “grumpflation”.

“Things are slowing, it’s not a downturn but they’re easing up. Then there’s a hell of a lot of pressure on costs. Everything is going up – rents, rates, fuel… there’s a fair bit of pressure going to go on disposable incomes.” end quote.

Minimum wage hikes in April create the ‘more money chasing fewer goods’ scenario that creates inflation, although in the current climate, I’m surprised it doesn’t mostly go on basics. Maybe it does. quote:

He said household savings rates were still negative and most Kiwis did not have a financial buffer to absorb cost shocks.

Imports are becoming more expensive because of a weaker New Zealand dollar and taxes are boosting already-high fuel prices. Now, another government policy, increasing the minimum wage, is predicted to soon play a part.

It will rise from $16.50 this year to $20 an hour in 2021. end quote.

No problem there, Cameron. Jacinda has taken care of that already, with fuel price hikes and fewer private rentals. $20 per hour will be going nowhere very soon. quote:

Economist Gareth Kiernan, of Infometrics, said consumers could expect to pay more in sectors where workers were earning at or near the minimum wage.  Hospitality was an industry likely to see some of the biggest effects, he said. end quote.

There is an easy fix to this. The government is always telling us that things such as the fuel tax will only cost the equivalent of ‘a cup of coffee a day’. No problem. Just drink less coffee. Eat less takeaways. Have less cafe lunches. For the most part, the hospitality sector is easily avoided if things get too expensive. quote:

“Firms have been able to withstand the margin squeeze over the last few years by increasing their sales volumes – less profit on each unit sold, but selling a greater number of units instead – but with population and economic growth now slowing, that strategy doesn’t look to be viable or sustainable going forward. end quote.

The hospitality industry is not going to be able to withstand the double whammy of increased fuel costs and higher wages. All their food costs will increase because of fuel price hikes and obviously, the cost of service will increase by about 20%. Add to that the fact that customers are going to be feeling the squeeze of higher fuel and grocery prices at home and they may well find themselves having fewer takeaways or coffees. So the hospitality industry is going to be hit hard by all of this.

There is another factor to take into account as well. quote:

Analyst Shamubeel Eaqub said about 75,000 people in New Zealand were on the minimum wage. “This is probably going to be the highest median wage we have seen relative to the median and it will add to costs.”

“Some industries might face upward pressure and a cascading effect as everyone says relative to that my wages should go up as well. That’s a pretty big increase in the pipeline… in those areas we are more like to see pressure on wages, which affects the cost of doing business and potentially leads to increases in prices.”

Bagrie said rising wages would normally be a good thing, but productivity needed to increase, too. end quote.

As the lowest wages increase, those further up the chain are going to look for increases too. So it is not just minimum wages that will increase. Wages across the board will be increasing proportionally. quote:

“There is/was always a risk that any increase in the minimum wage leads to higher inflation and therefore undermines the attempt by the government to lift the real purchasing power of lower-income earners.

“Unfortunately for the government, the boost to households’ purchasing power risks being further undermined by other factors that are more or less beyond the government’s control – petrol prices and the dollar. end quote.

This government managed to tank a strong Kiwi dollar without even trying and there is a lot they can do about petrol prices if they were so inclined… which they are not. quote:

“However, even with the substantial rise in petrol prices that we’ve seen over the last few months, the rise might have taken away about 20 per cent of the pay increase for a minimum wage earner working 40 hours per week. At this stage, they’re still better off – just not as much better off as the government would have liked.” end quote.

Depending on how far they have to travel to work, I suspect that the fuel price increases will take away a lot more than 20% of a minimum worker’s pay increase this year. quote:

Kiernan said inflation would not necessarily be bad for New Zealand, although it might hurt individual budgets.

It could allow the Reserve Bank to return interest rates to more “normal” levels, giving it room to cut again in future, should more stimulus be required.

That means, of course, higher interest rates on your mortgage, too. end quote.

Yes. The Reserve Bank’s mandate is to maintain inflation at a rate under 3% per year. All the signs are that inflation will be breaking through this barrier fairly soon. The bank uses interest rates to control inflation, by controlling the money supply. It is a vicious cycle, and it is about to start up all over again.

Must be time for Jacinda to get baby Neve out on TV again. That always works in a crisis.

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