People in the UK don’t want to pay more fuel tax

And I’m not bloody surprised either.  They already pay a very significant fuel tax, one that I feel covers the externalities associated with their fuel consumption.  When you have an externality, the government should tax to the point where the marginal cost of consumption is equal to the social marginal cost of consumption, taxing anymore than that is government failure.

However, in New Zealand we should pay more fuel tax, and I know one guy that agrees with me

What do you think?  (bonus points for picking up the obvious economic inconsistencies in the above article, as it will give me the opportunity to say what I really think)

Monetary policy: Aussie vs NZ

At least one Australian and one New Zealand commentator feel that the RBNZ is too focused on inflation. They use the example of the RBA, which seems to be controlling inflation without trying to strangle the life out of the economy.

Do people agree with this? Is our Reserve Bank an inflation zealot? Or does our Reserve Bank have a better idea of the long-term costs of inflation, and as a result, is more interested in stamping it out?

I’m not even sure that the situations are comparable, Australia’s growth rates and productivity rates have far outstripped ours, giving their Reserve Bank more leeway to control inflation. After all March non-tradable CPI inflation was only 3.5%pa in Australia, compared to 4.0%pa in New Zealand, indicating a significant difference in domestic price pressure.

Over US$0.80 we go

So, we broke 80cents US last night, on the back of expectations that the RBNZ will increase the OCR on July 26th. This led to the Dominion post terming us the strongest-performing currency in the world

Should the government intervene here? Is this a market failure caused by speculators and Japanese housewives that don’t understand the true risks?

I’m willing to stick my neck out here and say, I don’t think a strong exchange rate is that bad. Sure, non-food manufacturing is struggling, but no matter what the exchange rate is non-food manufacturing tells me they are struggling. A strong exchange rate keeps firms costs down, which has allowed domestic firms to increase margins without increasing prices, thereby removing a hell of a lot of inflationary pressure.

I believe the strong exchange rate is built on strong economics fundamentals (such as strong or improving commodity prices, and high interest rate relative to the rest of the developed world and a weak US economy), and I don’t think the current level is the end of the world, and I’m willing to bet that the manufacturers who are telling us it is are bluffing.

However, I know a lot of people will disagree with me. If so, tell me how and why you would intervene to change the currency (bonus points to anyone that tries to say lowering the OCR will reduce inflationary pressure, that cracks me up).

Telecom separation

So Telecom is to be operationally separated. To prevent the issue of double marginalization, the commerce commission is going to regulate the price set in the access market.

Do you think this is the correct way to regulate the access network.

While I believe it will lead to more competition in the wholesale and retail markets, I can understand the argument that states that this type of regulation will lead to lower investment (as firms invest until MB=MC, if the marginal cost of investment increases in the amount of investment, then lowering the price will lower the marginal benefit, and lead to a less investment.) I hear the government has a plan to improve Telecoms incentive to invest, does anyone know what it is? If so, do you think it will work?

The Warehouse merger

So the commerce commision has released documentation on their refusal to let Foodstuffs or Progressive buy the Warehouse. They believe that the merger would not influence the general merchandise or wholesale foods market, but would negatively influence supermarket competition.

Do you think that a merger would negatively impact supermarket competition, and if so how?

It is important to note that one of the significant factors behind the increase in the value of retail sales in the past few months has been rising supermarket prices. But is this the result of a lack of competition, or a result of the success of the Warehouse grocery chain (given that the Warehouse sells their grocery products at a higher price).

The week in numbers

  • The NZ$ pushed through US$0.79, but couldn’t quite reach the US$0.80 mark
  • CPI inflation came in at 1.0% for the June quarter, taking annual inflation to 2.0%.
  • 11% annual growth in short-term departures from New Zealand in June. This took departures to a record 208,309
  • 4% annual growth in short-term arrivals to New Zealand indicate a lack of price responsiveness from tourists. However, they are spending a lot less once they get here.
  • There was a net migrant inflow of 590 (seasonally adjusted) in June. The year-ended net migrant inflow continued to fall, and is now at 10,078
  • Electronic Card payments were up 7.2% on a year earlier in June. This implies that retail sales will maintain the gains experienced in recent months.

The recent strength in CPI, QVNZ house price and retail sales figures will make the RBNZ feel that it has to lift rates again. It is important to note that REINZ house sales and price figures looked relatively weak.

While the market is currently pricing in a 60% chance of a rate rise in July, I think they should hold. The QES and HLFS are due out between now and September, and will give us a strong indication of whether the labour market is beginning to ease. Furthermore, two more months of house sales data could be invaluable, with the housing market at a possible tipping point.