Inflation is back and that's a problem for the Prime Minister

NZ Herald

19-07-2025

Rising prices for vegetables and fruit are adding to the pain we're already suffering for butter, cheese and beef prices.
The Stats NZ release came with an avalanche of horrible numbers that confirmed what we're already feeling at the supermarket checkout.
Milk prices were up 14.3% annually, butter up 46.5% over the same timeframe and cheese up 30%.
Beef mince was up 21% and fruit and vegetables, which had been pretty good, rose 5% just in June.
Obviously, there are seasonal factors, but that's a big spike and recent flooding in key growing regions means things will probably get worse before they get better.
While overall inflation is considerably lower, grocery bills represent an outsize proportion of weekly spending for the poorest Kiwis.
Food prices are also pushing up the overall inflation rate and forcing the Reserve Bank to slow the pace at which it cuts interest rates.
That, in turn, slows the pace of economic recovery.
Tomorrow we'll get the full inflation figures for the second quarter.
Economists are picking annual inflation to land at 2.8% or 2.9% (up from 2.5%).
From there, they expect it to keep rising to more than 3% in the third quarter, above the Reserve Bank's mandated target range.
That all looks bad, but it isn't necessarily disastrous. Inflation should start falling again towards the end of the year, economists say.
In the politically sedate world of economics, all the talk is about tradeable inflation – the price of volatile, internationally priced goods.
Non-tradeable inflation, the stuff that is generated by wages and service costs in the core of the domestic economy, continues to fall.
It's hardly an upside. Ongoing recessionary conditions are expected to ensure that non-tradeable inflation keeps falling.
So there is a consensus among economists that the current inflationary conditions won't derail the economic recovery – they'll just delay it.
Politically, it still hurts. Remember 'survive to 25″!
We spent last year hanging on for the long-promised economic recovery.
Now we've got economists forecasting things will come right in 2026.
Looking at all the moving parts, I still remain optimistic that it will.
An agricultural export boom and low interest rates must eventually generate some growth in the New Zealand economy – it's just not that complicated.
But the waiting will be wearing thin for voters.
Next year it's the election already, which is cutting things fine for a Government that has staked its reputation on being all about economic growth.
As I said at the start, I don't think this is the Government's fault.
But details like that don't matter much where the economy is concerned.
Sometimes governments do cause or exacerbate inflation with overly stimulatory fiscal policy.
That isn't the case this time.
The Government can legitimately be attacked from the left for making the downturn worse by running a tight fiscal policy.
The counter-argument (which lands well with a lot of Kiwis) is that Crown debt is out of control and retrenching was the right thing to do in the long run.
Regardless of where you sit on that debate, it doesn't leave any reason to blame the Government for this latest inflationary spike.
Still, the idea that governments are responsible for the cost of living is almost unshakeable in the minds of a large chunk of the voting public.
The problem for Christopher Luxon and Nicola Willis is exacerbated by the fact they publicly took credit for bringing inflation down.
'This Government has delivered on its promise to Kiwis – our careful and deliberate plan to get on top of inflation is working,' Willis said in an August 2024 press release celebrating the latest RBNZ rate cut.
Also, the Nats weren't shy of heaping the blame on Labour when inflation soared in 2022, even though that was initially driven by international price spikes.
Labour complained at the time but is now happy to run the same attacks.
Labour leader Chris Hipkins continues to draw attention on social media to the price of butter, implying Government policy is to blame and ignoring the fact that dairy prices are currently the only thing saving the nation's economic bacon.
Despite my best efforts to explain the ins and outs of global commodity pricing, my inbox confirms the public remains highly engaged about the price of butter.
Did I say engaged? Sorry, I meant enraged.
I still don't get the obsession with butter. How much of the stuff do you actually have to use... put some Country Soft on your toast, it's fine.
But I don't want to downplay the real economic pain that high food prices cause.
I've personally found the rise in cheese and beef prices worse.
With two teenage boys to feed, we get through a lot of cheese and bulk our pasta sauces and nacho toppings with plenty of ground beef.
The notion that burgers or spag-bol are no longer affordable for many Kiwis is worrying.
The commodity cycle will turn. International dairy and beef prices will eventually fall.
But that will mask the real problem. It's not that food prices are too high, it's that wages are too low.
In the perfect world, prices for our export commodities would stay high, but New Zealand's domestic economy would be creating more well-paid jobs and generating higher wages.
A quick check on supermarket websites in Australia or Britain reveals that groceries (once you do currency conversions) aren't actually much cheaper there.
They just earn more than us.
The Prime Minister understands this and I believe him when he says his real policy goal is to boost productivity and wages.
But that's going to take time. Meanwhile, immediate conditions continue to pull the rug out from under him.
In the next few months, he faces a tough sales job to convince the public that the economy remains on the right track.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.