How high could fuel prices go, and what help could be on the way?

0:00Kia ora, I'm Chelsea Daniels, and this is The Front Page, a daily podcast presented by The New Zealand Herald. Inflation could hit 3.7% under Treasury's worst case inflation scenario. 12 petrol prices have risen about 45 to 50 cents a litre, adding about $23 to the price of filling an average car. Finance Minister Nicola Willis has outlined the government's priorities. First, a focus on supply chains, then potential and anticipated freight disruptions. And lastly, our economic response. Ministers are meeting daily, written situation updates, a twice daily, they're working closely with importers were being told not to panic. But after criticising the last government to no end about its economic decisions during

1:01the pandemic, what tools does this government have to ease cost of living pressures? Today on The Front Page, NZ Herald Business Editor at Large Liam Dan is with us to talk through what we could do next. So Liam, fuel prices are obviously continuously rising. They're still slightly below their 2022 peak, but it's reasonable to assume that they will get higher than the 2022 price point, right? So the government's rightly going to have to do something, but Willis has said that they won't be splashing the cash. Tell me why. Yeah, I think when you look at it, the government's trying to say that they're taking some lessons from the COVID inquiry that we've just had, you know, for chew it is timing for them in that sense. But they want to make sure that anything is really targeted. They feel like the previous government was sort of, you know, it was a genuine crisis. So they made it easy, they subsidised consumers, they put money into the economy, but of course

2:04in hindsight we can see that the economy actually coped quite well and that added to inflation. So the problem here is a few, have an inflation problem and you push more money supply into the economy, that actually exacerbates inflation. So something like cutting the excise tax on fuel would lower the cost of fuel, but would increase demand for petrol at a time when you're trying to restrict demand. You actually want to use less petrol. So yeah, those are some of the issues that would count against sort of a broad subsidy for consumers. Right, so why can't the government just give everybody 200 bucks and be done with it? Yeah, well that's where it's that money supply equation with inflation. So there's two aspects to inflation, even though some people will say, you know, the money supply is the number one, but so there's the issue of prices going up globally, which we can't control. Yeah, nothing. It's going to happen.

3:04It pushes the price up, but then when you add money to the economy, when you just, it's that classic, you know, dilemma with kids, you know, and they say, why can't we just print money? And then we do print money anyway, but the reason we tell the kids why we can't is that the more money, the more dollars there are in an economy, if we just add dollars without adding actual wealth, then those dollars are worth less. And so when a dollar's worth less, that's effectively inflation. That's push means that it takes more dollars to buy things and it's an inflationary spiral. And I think there is an argument there that, you know, we got into that situation and after that initial supply shock in 2022, you know, global events, push prices up, but because we had super low interest rates and, you know, subsidies going to consumers and taxpayers that really expanded the money supply. The economy overheated and we had more inflation than we might have otherwise.

4:06And so that's the rationale we're hearing from finance minister Nicola Willis, who is just, you know, wants to make sure that anything they do to ease the pain here doesn't make things worse, say, another five months down the track or something. So even say, you know, if the war was to go on for a couple of months and that would create some real pain points for consumers, it still could be the case that six months down the track. We've created an inflationary bubble that takes ages to unwind and we saw that, you know, the Reserve Bank has to then push up interest rates and take money out of people's pockets to sort of get inflation back under control and you can pay for that over months and years much longer than the initial crisis. So they're weighing all that up. It's not an easy position to be in because there will be a lot of consumers who are voters feeling it in their pocket. Yeah, she said that the advice that economists give about these situations, if you're going to provide any support that has to be temporary, timely and targeted to those most in need.

5:11So what are the government's options here? Yeah, they are limited, but, you know, something like working for families which, you know, you only get if you're up to a threshold, a certain income threshold could be adjusted and there's tax credits there that they could adjust to basically put a few more dollars in the pockets of the people who probably, I don't know if it's a politically correct term still or not, but, you know, the working poor, the people who are maybe, you know, both two people are working in low minimum wage type jobs and have to work full-time just to sort of keep the household rolling. It's where a price shock like this, if they have to drive to work and Nicola Willis keeps using the example of a shift worker going to the airport and, you know, who can't catch the bus and has to drive, you know, throwing an extra $50 or $80 a week in petrol costs on someone like that can be quite disastrous.

6:11So it could really see some people falling into a financial trap. And so those are the people that you need to look after, the higher income, the smaller fuel is as a percentage of your total income. So you can handle a shock. I mean, you might be talking about eating out less or something like that. And that's a different kind of situation and one where it probably isn't worthwhile, the government subsidising those people. I mean, it still creates a hit to the economy when you choose not to eat out because you got to pay more petrol costs. So there is still going to be flow on from that. But I think they're talking about dealing with the really acute pain. And there was a view around COVID because the crisis was so serious and so unprecedented that, you know, particularly for businesses, but getting money to people quickly was seen as a really valuable thing. And I think it was, especially in the first instance, for businesses, getting support to those businesses so they didn't just collapse. It was important.

7:11So the government at that time was all about getting the money out the door. But I think there is a view and certainly that, you know, the reviews that we've seen in the enquiries suggest that they just went on too long. It wasn't rained in as the economy started to heat up. So they have to keep a very close eye on what the real effects are in the economy. Because you will have noticed, there's a lot of speculation at the moment and we don't know what the actual net outcome will be on the economy. Yes, so Willis has said that the Treasury scenarios show higher inflation than anticipated. That's where we get the 3.7% figure. She said that that's too high for my liking, but points out that it's actually lower than Australia's. They're currently at 3.8%. And while we're entering unavoidable international cost pressures, her words, we are in a better position than other countries. Now, we are in a better position than other countries, but is it right to compare ourselves to Australia, for instance? Well, it's slightly different in that Australia's economy was growing at capacity, above capacity.

8:19So they were sort of already seeing strong economic growth which had started to drive inflation. You could say we were lucky, we were lucky, we had all these recessions because that meant our economy was so in such terrible shape that there was less inflation in the core of the economy. And so, economists had been expecting to see inflation come back a bit, we may still see it in the first quarter inflation figures because they weren't really affected so much by the war that core inflation in the economy is still sort of tracking downwards at a time when we're suddenly going to get this shop from the external things like the petrol and food prices. Yeah, so, I mean, we're in better shape because we're in worse shape, it's a bit of an oxymoron, but that's pretty much where we were in terms of inflation. It's like Trump coming out this week and saying it's good that oil prices are going up because Americans produce a lot of oil, a lot of people getting rich, right?

9:20Yeah, well, I guess if you've got shares and oil companies, it's pretty good. If what the government does is it just spends the bazookas, then that can add fuel to the inflation fire and lead to broader price increases across the economy, affecting everyone and getting into quite a dangerous spiral. The simple truth is that I can't stop the international oil price going up now. No. That's outside of my control. No one can. It's not something that I can control, and I hope that New Zealanders understand that, but it doesn't mean I'm not acutely conscious of what's going on in household budgets. Willis has said that she is not going to completely loosen the fiscal belt. Obvious reason, number one, would be the grief that this government has given the last government during the pandemic, of course, and after the pandemic. What would happen down the line, I suppose, if they did loosen the financial belt?

10:22Yeah, well, anything they do to subsidise, unless they cut services from somewhere else, their budget is already indeficit and trying to get back to a surplus in whatever it was three or four years or something. So that would effectively mean you're borrowing to subsidise in the short term. So you'd have to say, the pain's got to be so bad in the short term that we're going to load extra debt on people in the future, and that extra debt can translate to higher interest rates. It obviously means that we have to deal with it at some point, and that can mean having to cut services or something else. So this trade offs all the way through. So you've got that immediate thing of if the government pours too much money into the economy at a time when an economy is near capacity, then you create more inflation. So they have to worry about that, and they have to weigh up how bad it is, is it really worth borrowing more money from around the world to fund whatever subsidies they think

11:25are required? So that's another reason to stay quite targeted and make sure that you're getting your bang for your back in terms of helping the people most in need. Because is it either borrowing a whole bunch more money or having another look at budget 2026 and cutting money from educational health, and either scenario isn't really good in it. Yeah, that's right. No, no, no, scenario is a good. Yeah. I mean, I don't know, they're running pretty thin, they've done a lot of cutting already, so I don't think they'd be looking forward to that. I mean, there is capacity to, in terms, there's a lot of debate about how much debt New Zealand can afford to take on, but quite literally in practical sense, we can still borrow more money. We're still considered a good enough bet to raise more money if required. That's just those longer term issues that flow from it. What sort of impact do you think that this will have being that it is an election year? As I said before, obviously there's been a lot of factors out of their control, and voters

12:29seem to understand that. Nicola Willis herself does not have anything to do with the international price of oil. But is that rich coming from a government who said seemed to blame COVID on the last government? Yeah, I mean, look, that's politics, isn't it? And it's much easier in opposition to put all the blame for inflation, and in fact, sometimes when inflation comes down or various things have happened in the economy that have been to do with the good things happen, take the government, sometimes take the credit when actually it's a global trend. Yeah, I think a lot's going to depend on how they sell it in the leadership. People kind of understand, or should understand that this is a global problem, but when you go to the supermarket and you're paying more, when you go to the petrol pump, inflation really does make voters grumpy. We've seen it in elections all over the world.

13:30The cost of living crisis is probably the number one issue for most voters. And that seems to rub off on governments, even if you're sort of at the back of your mind still understand that it's not really their fault, well, they're going to cop it. So that puts the onus on, I guess, the prime minister and the finance minister and the rest of that coalition to really do a good job of explaining and showing some leadership through what is looking like. If not a crisis, a very serious and worrying situation for the coming weeks and months as we head in to the election campaign. So we will be looking at it through the lens of if we were to do it, it would be timely, it would be targeted, and it would be for a period of time. You can do things that are lots of short-term gain, but create lots of long-term pain. That's really the lesson out of the COVID spending, where half of the $60 billion didn't

14:33go anywhere near COVID and didn't really lead to any better schools, hospitals or roads across the country at all. And so we just want to make sure that we'll work our way through it very systematically and I think very calmly, very responsibly as we've been doing. Speaking of voters being grumpy, especially at the supermarket, we've got food prices increased 4.5% in the last 12 months. Is that good? It's not been great going in. So on one hand, the economy has been improving and we're getting all this data for up until the time the war started. And it's mostly showing that the economy kept improving up to that point. But inflation actually was still pretty strong and it's inflation in areas that people feel most acutely being food prices really at the grocery store. Over the last year, petrol prices had actually come down and we're down about 6%. So we went into this shock actually in a pretty good place with petrol prices and global oil prices.

15:40So perhaps it's not as bad as it could have been, but you're seeing it with things like that we export and do really well from in a sort of a net equation. It's great that beef prices are really high because that's more money coming into New Zealand. But I also don't like paying. I mean, what is it? Beef mince is up 23.2% annually. I thought beef mince was the cheap one that you could get and put on time. Why can't you just be happy for the farmers, but more money tells you. That's the difficult sales job, right? So because it feels like, well, hang on. So the rural communities are doing really well. But in the cities, people are... But I can't have a ball of nose. Yeah, that is tough. Beef prices are a tough one. And unfortunately for the government, Buttergeden, which you remember from 18 months ago or whatever, I think what we've seen on global dairy markets has been really good for Fonterra and the dairy farmers. It is to sort of a low-ish sort of level about four or five months ago.

16:43And prices have shot up since then. So we're going to see that flow through in the next few months. And probably sometime around May or June, we're going to see those consumer prices for butter and cheese, back at levels that make people very unhappy. And that's a real cultural hotspot and an issue for the government too. Even though it's a net equation, more money coming into the country, probably keeping the economy afloat. But you've got to sell that to voters who might not be feeling it when they're actually picking up their KG of cheese every week, if they can still afford that. Yeah, I quite like Buttergeden. Is that something that we're trying to do? I think we know. I think that's where we went for that. That's where we went about 18 months or two years ago. The last big price spike and everything's different. But commodity markets have this sort of flow through. And so petrol prices are a lot quicker. It takes longer for the retail price of butter and cheese to flow through

17:44from the commodity price spikes. We've seen petrol prices move pretty quickly, actually, because... Real quickly, but they paint advance though, right? Yeah, they're looking forward. So there's a futures market involved. In some ways, I find that heartening as well, though. Because we've seen warnings of people say, could petrol go to $4 a litre? Well, maybe if it went to $200 a barrel, right now, it's sitting at $100 a barrel. The people who trade oil can see that the Strait of Hormuz is closed. They can see that the war doesn't have a defined ending on it. So they can see a lot of the risk there already and they're trading into the future. That's not $200. They're not spiking up in a panic at the moment. And I think it would take something pretty disastrous to put it up to those levels. So, yeah, look, you might see the petrol price scale, but more because it hasn't necessarily all flowed through the increases we've seen. On the commodity markets, it takes a little while.

18:45There'll be some movements around the dollar. People in a war situation, an international crisis situation, the US dollar becomes a safe haven and that tends to go up, which means our Kiwi dollar comes down and that adds to the cost of imported goods for us. Those things could happen, but look, I would be, you know, touch wood. I'm hopeful that we sort of see some stability around this 100 and a bit, sort of barrel price, which means that petrol shouldn't go up too much more before we hit a plateau and hopefully, you know, that's when markets and, you know, consumers and things. We find ways around it longer term, you know, markets would find a solution for this. It's not like COVID where something's sort of, we're not in the war. We're going completely blind, yeah. It's not something, you know, where we're at risk of dying here. It's a product. There's actually enough of it in the world. The problem is moving it around the world and, you know, that would be resolved in the long term,

19:50in the short term, we've got enough petrol in the country. I see a potential issue in the medium term if, you know, supplies start to run short in three or four weeks and that's where the government has to look to possibly, you know, taking some action around, you know, at worst case would be, you know, looking at some sort of rationing where you have to ensure that your essential services get first go at the petrol and that sort of thing. A callous day. Well, people have talked about callous days. We have no hold episode on that. Basically didn't work. Terrible solution, exactly. And I would think that there'd be plenty of things they'd do before then, you know, we know from COVID that we can work from home and the economy doesn't collapse. So, you know, encouraging non-essential workers to work from home, subsidies for public transport, that sort of thing might be a lot more effective. There was a lot of work to organise callous days, get your sticker and all that sort of stuff for not much gain.

20:50Thanks for joining us, Liam. Cheers, Chelsea. That's it for this episode of The Front Page. You can read more about today's stories and extensive news coverage at NZherald.co.nz. The Front Page is hosted and produced by me, Chelsea Daniels. Kane Dickie is our studio operator, Richard Martin, our producer and editor, and our executive producer is Jane Yee. Follow The Front Page on the iHeart app, or wherever you get your podcasts, and join us next time for another look beyond the headlines.