A typical family people-mover, like a Toyota Previa, costs around $140 for a full tank of petrol, up from $100 not so long ago
Reserve Bank Governor Alan Bollard gave a balanced view of the economy in his latest review of interest rates. The message was no change any time soon, with lots of balancing counter-weights at work in the economy.
That’s why there are different schools of thought on the degree to which inflationary pressure could be resurgent in an economy with spare capacity. Fuel is one such higher cost. When a typical family people-mover, like a Toyota Previa, costs around $140 for a full tank of petrol, up from $100 not so long ago, the potential for impact on discretionary spending is obvious, let alone the inflationary pressure.
On the other hand, there's the long, lingering impact from the two Christchurch earthquakes. While these impacts appear increasingly to be localised, they have dampened short term growth but could have inflationary impacts once rebuilding starts in earnest next year.
Partly helping to offset that, however, is the likely reallocation of resources for infrastructure spending in the May 19 Budget. Some projects are likely to be delayed, while it looks certain that there will be impacts on middle and higher income families when the Budget changes Working for Families entitlements to reduce so-called 'middle class welfare.'
In the meantime, Bollard's statement did little to shift market expectations of the timing for a return to interest rate hikes. If anything, he hinted at the first quarter of 2012 to begin raising the official cash rate again, with some economists believing rates will start rising by the end of this year.
Inflation, which has flared short-term to an annual 4.5%, will return to the central bank's 1%-3% target band, Bollard said. But some economists think that's a bold call, given rocketing prices of raw materials.
A high kiwi dollar keeps the lid on that pressure when those inputs are priced in U.S. dollars, but global prices tend to drive domestic prices. For example, Fonterra's costs go up when the world price of milk rises.
The kiwi dollar sold off when Bollard's latest statement hit the market but it is sailing near three-year highs, and beyond that would be at a post-float high. That only encourages a continued flood of goods bought cheaply in China, whose currency trades within coo-ee of the U.S. dollar.
Bollard has previously said the economy will come roaring back as money gets spent rebuilding Christchurch. Not for nothing have shares of Fletcher Building, New Zealand's biggest construction company, added more than $1 this year.
So for a second year, New Zealanders are being primed to be patient over the nascent economic recovery.