A supermarket receipt dug up from up decades ago shed light on how much staples like bread, milk and fruit juice used to cost. Photo / Getty Images
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.
OPINION
Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up to my weekly newsletter, just click here, select “Inside Economics” and then save your preferences. For a step-by-step guide, click here.
If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
This column has had a bit of an obsession with grocery prices for the past few weeks. That’s partly because the supermarket shelves represent the inflationary coal face for most Kiwis. It’s also because I do most of the shopping in my house.
So I was interested to see the story about the long-lost Pak’nSave receipt from 1994 (initially from a Reddit post). The receipt tallies up a moderate-sized family shop and comes in at $86.61.
Using the Reserve Bank’s inflation calculator (which allows us to compare real prices back 1862), the cost in today’s dollars would be $186. While that seems like a big jump, 30 years is a long time. It actually equates to an average annual inflation rate of about 2.6 per cent.
That’s a reminder that (the last two and a half years aside) we’ve been living through a relatively low inflation era since 1994.
Some foods on the list looked surprisingly expensive: three litres of juice for $4.29, a pre-made pizza for $5.49 and frozen fries for $2.99.
These items are all cheaper now in inflation-adjusted terms. In fact, the pizza is cheaper in nominal terms.
Compounding 2.6 per cent inflation over 30 years gives you a total increase of about 120 per cent. So I suppose we could say that for any items that are less than 120 per cent more expensive now, we’re doing okay.
It is probably no surprise to those who worry about the health effects of processed food that some of those mass-produced foods have become cheaper. Meanwhile, fresh food meat and fruit and vegetables seem a lot more expensive now.
Okay, the tomatoes looked pricey at $6.75 a kilo, although we should note that the receipt is from July when prices are seasonally higher.
And good luck feeding your family with $3.50 worth of gravy beef these days. I blame all those hipsters and their passion for slow-cooking BBQ for pushing up the price of those once super-cheap cuts of meat.
These days blade steak, chuck steak and brisket aren’t really much cheaper than sirloin. But I digress...
How much targeting inflation saves us at the checkout
Turns out I wasn’t alone. The long-lost receipt also caught the attention of Westpac senior economist Satish Ranchhod, who posted about it on Linked In.
“This article from the NZ Herald got me thinking about a question we often get from clients: why do we need to get inflation back to 2 per cent, rather than just inside the RBNZ’s 1 per cent to 3 per cent target band?” he wrote.
That’s a relevant question right now as we bear the brunt of high interest rates to deal with the last sticky per cent or so of inflation. How much stress should we put the economy under to get back to 2 per cent?
If inflation had instead been 2 per cent over that period, that same basket of groceries would have cost $157 (as opposed to $186 at an average of 2.6 per cent), Ranchhod said.
“In contrast, if inflation averaged 3 per cent, it would cost $210. The difference between those two outcomes ($53) is a chunky amount for most families. And that’s just one trip to the supermarket.”
Over a year, the difference between 2 per cent inflation and 3 per cent inflation would stack up to roughly an additional $2750 on your grocery bill, he calculated.
“And that’s just spending on food, which accounts for roughly 20 per cent of the average household’s spending. Inflation pressures are currently much more widespread, including large increases in the prices of other necessities like rents, insurance and charges for local government services.”
“The trade-off is that to ensure inflation settles at 2 per cent, we do need a period of higher interest rates to dampen economic activity and reduce inflation pressures. Since 2022, the average mortgage rate that households are paying has risen from 3.2 per cent to 6 per cent. That’s been tough for a lot of families, especially with the jobs market now also weakening.”
No need to remind us about that. The pain of high interest rates is now hitting its peak and the economy has been struggling with recession and rising unemployment.
But Ranchhod does go on to look at what happens next.
“Right now, annual inflation in New Zealand is around 4 per cent. We expect that it will continue to drop back over the coming year. But the question is: when will it get back to 2 per cent?”
“While we think that inflation will drop back close to 2 per cent by the end of next year, we suspect the RBNZ might actually be comfortable with inflation lingering a little above the 2 per cent mid-point of its target range. However, that additional inflation premium could eventually become built into longer-term interest rates.”
Meanwhile, tune in at 2pm today to hear the latest call from the Reserve Bank as it delivers its May Monetary Policy Statement. It’s not expected to move the Official Cash Rate or even change its outlook much... but we’ll find something interesting to say!
Okay, so the Reserve Bank (RBNZ) has engineered this economic downturn and we’re all holding on for a rebound in 2025, when rates start falling. As I wrote on Sunday, “survive ‘til ′25″ has become the business catch-cry this year.
But there is more to this recession than just interest rates. There are other headwinds for New Zealand’s economy, not least the slowdown in China.
The Chinese economy was in the spotlight on Monday with the China Business Summit 2024, hosted by NZ INC. and the Auckland Business Chamber.
Hong Kong-based ANZ China economist Raymond Yeung presented a detailed breakdown of the outlook for China. He warned that GDP growth is slowing and will continue to slow but also suggested it was no longer the most important metric for the Chinese economy.
We should probably put the slowdown into context. China’s official GDP growth rate was 5.2 per cent last year. As a US$18 trillion ($29.5t) economy, that means it still added almost US$1t – or about four times New Zealand’s entire GDP.
“Slower GDP is not a disaster,” Yeung said. “It is not really critical any more.”
Yeung said New Zealand exporters should stop worrying so much about the macro-economic story. It is just too big to be relevant for most Kiwi exporters.
Instead, he advised those doing business in China to focus on their sector conditions and the structural changes that will impact growth for them.
We can see this coming through in the differing returns for New Zealand exports. Dairy and meat prices have rebounded in the past few months but are still well off record highs.
Timber prices have slumped, however. ANZ’s Commodity Index for May says: “The forestry index plummeted 8.5 per cent in April, with log prices now at their lowest level since October 2016. China is our main market for logs and demand from that market is extremely weak at present as construction activity remains subdued.”
The property sector remains the biggest problem for the Chinese economy, Yeung said.
As well as having a direct impact on demand for building products, the shakey sector has undermined consumer confidence.
As the Financial Times has reported: “Beijing announced some of its strongest moves yet to revive its debt-stricken property sector, encouraging local governments to buy real estate and relaxing mortgage rules as it seeks to boost a recovery in the world’s second-largest economy... China’s central bank, the People’s Bank of China, unveiled a 300 billion Rmb [$68b] re-lending fund to support such purchases from local state-owned enterprises, saying it would drive up to Rmb500b of bank lending. Earlier the Bank of China lowered the minimum downpayment for first-time homebuyers from 20 per cent to 15 per cent, and said it would scrap minimum interest rates on mortgages.”
These were significant measures, Yeung said. They would ensure that China doesn’t experience a property crisis along the lines of the US sub-prime crisis in 2006 and 2007.
But, he warned, they won’t solve the issues of oversupply in the property market which he estimates will take at least three and half years to unwind.
That’s ominous because it suggests that we can’t rely on Chinese consumers to give New Zealand’s economy the boost it so badly needs. Dairy consumption has stayed relatively strong but the subdued number of Chinese tourists we’ve been seeing post-Covid isn’t likely to pick up dramatically in the short term.
Chinese consumers are opting to travel domestically for the big holidays and the domestic spending around the last New Year’s celebration set a new record.
Meanwhile, the manufacturing and export part of the Chinese economy is kicking back into gear. That will keep GDP growing but it doesn’t really help with high unemployment and consumer confidence because it is so automated – with heavy use of robotics and AI (artificial intelligence).
What was needed was a rebound in the services sector to boost employment and consumer confidence, Yeung said. That would help drive consumption of Kiwi exports but was also tied to the fortunes of the property market, so a significant lift was three and a half to five years away, he said.
Economics’ own 3 Body Problem
Drawing on the popular Netflix sci-fi series 3 Body Problem, Yeung outlined an economic version of the famous astronomical problem.
In astronomy, predicting the gravitational path of a celestial body (like a planet, moon or asteroid) becomes highly difficult as soon as you get three bodies involved.
Yeung suggests there are three independently moving economic forces we need to pay attention to, making forecasting the outlook very difficult.
They are cyclical, structural and what he calls randomness. The cyclical refers to the ebb and flow of monetary and fiscal policy and the ups and downs of inflation, GDP etc.
When it comes to the current economic cycle, most of the world was battling inflation and waiting for the US Federal Reserve to start cutting interest rates, he noted.
But China is grappling with deflation.
One effect of this for New Zealand (and several other nations) was that we would be attractive to Chinese investors looking to make the most of the interest rate differential (or what economists call the “yield gap”).
The cost of borrowing was now so cheap in China that we should expect to see capital flight in the next few years. Even as the US-led interest rate cycle turned, yields in the West would likely remain much higher until China’s property cycle turned.
The trend could be good for New Zealand if it were open to more foreign investment from China offering a potential source of funding for infrastructure investment.
Yeung said structural issues were often overlooked but could be more relevant for New Zealand exporters.
These were issues like demographics and technological and industrial transformation, such as the advance of AI.
The third body in the economic equation was randomness - a category into which Yeung puts geo-politics, US elections, trade wars, real wars, climate change and extreme weather.
These could be significant. But he warned not to overplay the impact of things like US President Joe Biden’s recent tariffs. They were minimal and applied to only around $18b of the nearly $430b of goods the US exported from China. That represented perhaps 0.01 per cent of GDP, he said.
However, a Donald Trump presidency would be more significant. Based on his rhetoric and actions in his last term, it was possible he could impose tariffs that could equate to a 0.9 per cent cut to China’s GDP, he said.
Outspoken fund manager Sam Stubbs says yes. He has pointed out that the latest bank profit numbers show that their net interest margin (ie what banks charge for loans versus what they pay for deposits), is much higher in New Zealand than in Australia.
By his numbers:
- ANZ was 66 per cent higher (2.59 per cent v 1.56 per cent)
- BNZ was 37 per cent higher (2.37 per cent v 1.72 per cent)
- ASB - 11 per cent higher (2.21 per cent v 1.99 per cent)
- Westpac - 10 per cent higher (2.09 per cent v 1.89 per cent)
Bank profits are now 2.5 per cent of GDP in New Zealand, but only 1.3 per cent in Australia.
“In New Zealand, the banks focus on very low-risk lending, with very high margins,” he says.
But the Aussie banks put the blame squarely on higher capital requirements this side of the Tasman. In other words, they blame our Reserve Bank!
Who’s right? Business Herald Wellington editor Jenée Tibshraeny took a deep dive into the issue this week.
She talked to Grant Spencer, a former RBNZ deputy governor, head of financial stability and acting governor until 2018.
He argued that the impact of the capital rules on banks’ net interest margins (NIMs) shouldn’t be overstated.
According to his calculations, the New Zealand banking industry’s NIM would be 2.1 per cent, rather than 2.2 per cent, if their capital ratios were the same as the Australian banks in 2023. (Note, Spencer used “assets”, rather than “interest-earning assets” in his calculation).
This would still be above the 1.85 per cent NIM for the major Australian banks in the second half of 2023.
The BNZ noted that BNZ also has a different composition to its Australian parent, as well as different levels and mixes of deposits, which affect NIMs.
Former Westpac treasurer Jim Reardon agreed with BNZ and ANZ.
He also noted banks had been open about the fact it’s taken Kiwis a while to put their money in high-interest earning accounts following the Covid era, when low interest rates made term deposits unattractive.
ANZ and BNZ recognised this point too.
But Spencer was unconvinced, citing the lack of competition in New Zealand as a key issue.
Who to believe? Well, perhaps we’ll just have to wait for August 20 when the Commerce Commission publishes its final report on its market study into banking.
The job market continues to tighten, the latest Seek job ads data shows. Job ads tend to be a lead indicator of where unemployment (and employment) are headed. So probably no surprise here, with most economists expecting unemployment to rise from 4.3 per cent currently to a peak of around 5.5 per cent. That would - for the record - equate to another 30,000 people being out of work.
If you have a burning question about the quirks or intricacies of economics, send it to liam.dann@nzherald.co.nz... or leave a message in the comments section. He’ll try to answer in Inside Economics, published every Wednesday.
House prices will be 20% lower in real terms by the mid-2030s than in 2021.