Posted on 16-8-2004

Petrol Fuels Inflation
14.08.2004 By Brian Fallow

If rising petrol prices are making your pockets a little lighter, the
direct cost is just the tip of the iceberg.

Petrol prices have climbed 16c a litre over the past six months, adding $4
a week to the average family's costs, say Westpac Bank estimates. But that
is just the beginning: higher fuel costs push up the price of everything
that is transported. In the June quarter, more than half the 652 items in
Statistics New Zealand's inflation basket rose in price, though not all
those increases can be laid at the door of fuel costs.

What has the Reserve Bank worried is that this oil rise comes at a time
business is generally good and unemployment is at 17-year lows. That
increases the risk firms will pass on higher fuel costs to customers, and
pay increases to compensate employees for a higher cost of living, passing
those costs on as well. That raises the prospect of spiralling inflation,
and the only way the Reserve Bank can resist that is by raising interest
rates. And the more it costs people to fill up the tank, the less they
have to spend on other things. That will slow the economy, both in New
Zealand and in the wider world, hitting exporters.

But a return to the "stagflation" era of the early 1980s, with crawling
economic growth and rampant inflation, is not on the cards. Adjusted for
inflation, oil prices are still well below their level then. So far, at
least.