New Zealand households are being squeezed into paying more while getting less at the pump, with mounting cost pressures now raising the prospect of an official cash rate hike as early as May, according to one economist.
Brad Olsen, chief executive of Infometrics, pointed to fresh data released Friday by Stats NZ showing total fuel spending in March reached just over $580 million—around 10% higher than the same time last year.
Olsen said fuel prices themselves were the real driver behind that increase.
“We estimate that prices were about 14% higher in March compared to a year ago, and that’s sort of a weighted average across all fuel types, which means that actual volumes of fuel purchased probably declined about 4% compared to March last year,” he said.
“Keeping with that expectation that probably for the first two weeks households were going and trying to fill up before things got even more expensive, and then they were trying to park their car up a bit more and not use the very expensive fuel that they just got because no one wants to refill with even more expensive fuel out the other side.”
Fuel spending surged 19% compared to February, reinforcing what Olsen sees as an ongoing trend.
“Spending activity on fuel will remain high but over time the actual volumes being delivered are likely to remain a bit more subdued.”
He said this would likely apply more to petrol than to diesel.
“In terms of volumes, just simply it’s still required in so many parts of the economy that you just can’t move away from.”
“We’ve also looked at card spending on core industries, so excluding fuel and vehicles. That figure declined 0.1% in the month of March compared to February on a seasonally adjusted basis.
“Not an immediate sign of demand destruction. I think because everyone, again, was just getting their heads around what was going on throughout the month.”
“But we would expect going forward that households, because of how big of a drop confidence had in March and clearly is still going to have in April, plus potential interest rate hikes coming through, that does make for a pretty challenging position where a lot of households are going to go, ‘I’m probably not going to spend all that much. I’m going to try and limit my overall consumption because I’m just so worried about what’s coming next’.”
Inflation Starting to Look “Pretty Ugly”
At the same time, inflation pressures are intensifying. Olsen described the outlook as “pretty ugly,” saying Infometrics’ forecasts are running higher than those from the Reserve Bank of New Zealand and other economists ahead of data due next week.
“The worry for the Reserve Bank there is that, yes, clearly there’s higher fuel prices and similar that have come through. But even pricing pressures in parts of January and February are probably more intense than the Reserve Bank would be comfortable with.”
“If you’ve already got a position before the fuel crisis where pricing pressures were higher than anticipated, despite a still fledgling economic recovery, that sort of says to the Reserve Bank that businesses were already primed around prices going up. There was already more underlying inflationary pressure.”
“You then add on the pressures that you’ve got now and everyone’s saying, well, I might have to raise my prices to try and cover the increases that I’m having to pay for.”
“That does set you into that pretty worrying position where, for the Reserve Bank, they might well be facing higher starting inflation and clearly higher ongoing inflation. It could be a pretty potent mix for inflation expectations, which is why we’ve opened the door… to a more lively conversation for a May hike, potentially, than I think a lot of people are sort of counting on.”