Westpac economist Satish Ranchhod points out that while takeaway coffee prices haven’t risen to the same extent, they have been nudging higher. And combined with the rise in milk prices – up 15% in the year to April – the risks are “tilted towards further increases in takeaway coffee prices over the coming months”.
I should confess here that I don’t personally care about this.
I’ve already given up buying cafe flat whites unless it’s required for some sort of social occasion.
I actually had to ask around to find out how much they cost now – apparently, $6-$7 is pretty normal.
No wonder kids can’t afford houses in central Auckland. Just joking!
The issue does highlight a serious dilemma for hospitality businesses as they face the squeeze from falling demand and rising prices.
Further lifting their prices risks reducing their sales, but not passing on price increases, cuts into already tight margins.
This can threaten the viability of the whole business, as we’ve seen with numerous hospitality operations closing down in the past year.
In fact, the return of commodity price inflation creates a dilemma for the whole economy.
Butter prices are currently the subject of much consumer angst.
In the past, it used to be cheese prices that wound Kiwis up.
I’m not quite sure why cheese prices aren’t bothering more people – it’s much harder to substitute with other products than butter.
I guess it’s just the more extreme price rise we’ve seen for butter.
The latest food price data from Stats NZ showed butter prices are up 65% in the past year.
It’s butter’s time to shine.
Cheese is only up 24%, although you can bet it’s going to rise further.
The surge in butter prices has raised that Kiwi classic of an economic question: why does dairy cost so much when we produce it here?
The answer is simply that farmers – or the companies like Fonterra that represent them – are always going to sell their products for the highest price they can get.
Why wouldn’t they? They’re businesses.
The Government could choose to put a cap on local prices, but it would have to compensate farmers for the lost earnings.
That’s a state subsidy. So, effectively, we’d be using taxpayer money to provide cheap butter, cheese and milk.
Add what is so special about dairy that it should be subsidised. What about seafood, apples or kiwifruit?
What about meat and veggies?
State-subsidised food is effectively a form of socialism, and some do make a case for it, especially around ensuring access to healthy food.
The thing is, we have to pay for it one way or another. It also gets complicated and difficult to administer.
I’ve heard the suggestion that we remove GST on fruits and vegetables, but I don’t think any of our major parties are advocating for outright subsidies.
It’s important to remember that, on balance, New Zealand’s economy is benefiting right now as record prices for dairy and beef bring in much-needed extra billions.
Economists estimate the spike in dairy commodity prices, combined with good production levels, will bring in an additional $10 billion over the next two years.
There might be another billion or so of extra export earnings coming in from elevated beef prices.
That will deliver a massive stimulatory bump to the economy.
It will take time to flow through to the urban sector, but the agriculture sector might just save all of us.
I’m always very quick to point this stuff out when the headlines about the price of butter and cheese start to roll out.
Higher food prices pose the risk of reigniting inflation and pushing interest rates higher.
But right now, economists don’t see the rise in commodity prices as a threat.
The turmoil on global markets has created winners and losers.
While dairy, coffee and beef are at record highs, oil prices have slumped.
That helps the inflation equation.
Economists are also confident that core inflation – the stuff that isn’t so volatile, like rent and wages, is still falling.
That doesn’t mean rising consumer prices aren’t a serious issue, especially at an individual level for those already struggling to pay the grocery bill.
Rising commodity prices are good news when they are for things New Zealand exports and bad news when they are things we import.
Unfortunately, we have no control over what goes up and what goes down around the world.
Commodity markets are fickle at the best of times, subject to weather events and geopolitical disruption.
And these certainly aren’t the best of times.
New US tariff policies are about to add another layer of uncertainty to the price of all globally traded goods.
There’s going to be winners and losers once the dust settles on all the trade turmoil, but it’s not quite clear who they are yet.
So far, though, it looks like a promising scenario for New Zealand.
We’re going into the tariff storm with high demand for dairy out of China and high demand for beef out of the US.
Perhaps the biggest risk then is that panic about rising prices takes hold. We’re all still shell-shocked from the horrible inflation through 2022 and 2023.
The fear of inflation can be self-fulfilling as businesses adjust pricing based on expectations.
For now, we just have to take a deep breath and trust that the outsized price rises in some key products don’t mean we’re facing another inflation shock.
Just try not to take that deep breath while walking past a cafe full of freshly roasted coffee and hot buttered scones.
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.
