Liam Dann: Deepening war in Ukraine means more price pain for Kiwis, more pressure on Government

The price of petrol has soared since Russia invaded Ukraine. Photo / Dean Purcell

OPINION:

"Eye-popping" is how ASB economist Nathaniel Keall describes the movement of global commodity prices in the past few days.

For local consumers already struggling with the highest inflation rate in 30 years, the deepening war in Ukraine is bad news.

The renewed surge in oil and wheat prices means we should brace for more hikes in the already inflated cost of petrol and groceries.

ASB now says we should expect consumer price inflation likely to exceed 7 per cent in the first half of this year.

That means more pressure on the Government as it faces a National Party now targeting the cost of living as its primary line of attack.

Crude oil prices soared sharply on Friday and again yesterday, despite having initially settled in the wake of the Russian invasion.

On Monday afternoon Brent Crude hit a 13-year high above US$139 before easing overnight.

Brent Crude now sits at around US$124 a barrel ($181) up about 35 per cent since the start of the war and more than 80 per cent higher than one year ago.

"The leap was much more dramatic than the gains seen in the first week of the conflict, which is a reflection of the tightening in Western sanctions on Russia, ASB's Keall said.

Russia is the largest supplier of oil and gas to Europe. It is the world's third-largest oil producer - behind the US and Saudi Arabia.

Fearful of a price shock, the international community's sanctions against Russia do not yet include restrictions on imports of its oil and gas.

But pressure is mounting as the conflict escalates and the human toll deepens.

At the weekend US Secretary of State Antony Blinken said the Biden administration and its allies were now discussing an embargo of Russian oil.

Meanwhile, wheat prices are now up 40 per cent on disruption to Ukrainian exports and fertiliser prices are rising as Russia seeks to impose its own limits on exports.

All of this suggests that we face more consumer price inflation in the coming weeks.

Most economists - and the Reserve Bank - had been forecasting it to peak in the first quarter of this year.

That may now not be the case. And that could mean interest rates rising faster than previously expected.

As the Omicron wave peaks and pandemic restrictions ease, its inflation and the high cost of living look set to dominate the political debate.

National Party leader Christopher Luxon appears to have made that call.

National leader Christopher Luxon. Photo / Mark Mitchell

At the weekend he launched National's tax policy - reversing Labour's new taxes, including the Auckland regional fuel tax.

Last week the price of unleaded 91 passed $3 per litre in Auckland - a price rise of about 40c per litre in just four weeks.

The Government has thus far stuck to its guns, arguing it isn't responsible for the inflation being caused by global events like war and the pandemic.

This is true but will only placate voters so far.

As time marches on the question of "who is to blame" becomes less relevant than questions about what is being done to mitigate the price pain voters are feeling.

The Government has no control over global commodity prices but Luxon's policy response looks forward and focuses on what governments can control - tax.

He has promised consumers relief via a reduced tax burden.

The economic merits of this will be subject to increasingly fierce debate. But politically it puts the ball back in Finance Minister Grant Robertson's court.

The Government hopes that inflation would ease quickly as pandemic restrictions eased around the world are being blown out of the water by Vladimir Putin's war.

One suspects that is no coincidence.

Putin seems prepared to play a game of chicken with Western politicians over who can best weather the inflationary economic fallout from sanctions.

In the US President Biden faces growing voter concern as price pressures bite, with the strength in other parts of the economy (such as job creation) going largely unappreciated.

Oil prices surged last week as the fear of tougher sanctions on Russian energy exports grew. Photo / AP

Regardless of the politics, it is clear that, unless there is a quick resolution to the war, prices are only headed on the way up.

Bloomberg reports that Goldman Sachs is now picking, that without Russian barrels on the market, oil could reach US$150 in the next three months.

JPMorgan Chase & Co says Brent crude could end the year at US$185 a barrel if Russian supply continues to be disrupted.