BusinessApril 18, 2023

Economists predict New Zealand’s price rises will continue to defy Orr’s hammer. Why?

Founder

New Zealand started hiking rates earlier than most, and has among the highest central bank interest rates in the OECD. Yet bank economists are picking inflation to stay high.

We won’t get the official data until later in the week, but economists at New Zealand’s major banks are uniformly predicting that inflation will stay stubbornly high when figures are released on Thursday. The big four Australian banks, along with KiwiBank, all predict that the Consumer Price Index (CPI) for the first quarter of 2023 will show an annual increase of somewhere between 7% (WestPac) and 7.2% (ANZ and ASB). If those predictions prove correct, that will be four consecutive quarters (also known in the industry as “a year”) of inflation sitting around 7%, which suggests that the new emphasis on bread-and-butter issues has had no impact on the cost of bread and butter. In fact, the biggest driver of inflation over the past year has been the cost of bread, butter and other foodstuffs.

The banks’ predictions cover the first complete quarter since Reserve Bank governor Adrian Orr made his infamous “cool your jets” speech, attempting to shock New Zealand’s consumers into keeping their Eftpos cards in their wallets. It was the central bank equivalent of a parent admonishing their kids not to party while they go away on holiday, but our bank economists believe the warning went unheeded – that New Zealanders could not keep it (their wallets!) in their pants, and instead kept the post-Covid rager going for another three months.

There is already ample evidence to back this up, and Orr has twice raised interest rates by a chunky 50 basis points (.5%) since his shockingly blunt speech in late November of 2022. It’s two weeks since he last hiked rates, which now sit at 5.25% – well above the Eurozone (3.5%), Australia (3.6%) and the UK (4.25%). New Zealand is currently above even the United States, which has pushed its Federal Reserve rate to 5% – but at least the US has strong evidence that inflation is getting under control, with its consumer prices easing from 6% in the year to February to 5% in the year to March.

No one thinks New Zealand is tracking down to any major degree yet. If these forecasts are correct, then despite an aggressive tightening cycle that has seen rates rise by a cumulative 4.5% in just 18 months, New Zealand’s inflation remains more or less impervious to its central bank’s efforts – which is why economists from ANZ and KiwiBank are still predicting one more rate rise will follow in May. Below I’ll run through three major factors the chief economists at our banks cite as reasons why New Zealand seems no closer to getting inflation back into its 1-3% target band.

The grocery bill is too damn high

“With Cyclone Gabrielle devastating areas dubbed the ‘fruit bowl of NZ’,” wrote KiwiBank’s economists, “it’s no surprise to see a chunky double digit increase in fruit and vegetable prices.” Stats NZ released its Food Price Index data for the March quarter yesterday, revealing a brutal 12.1% increase in food prices year-on-year. Categories were up across the board, led by an eye-watering rise in fresh fruit and vegetable prices. None of it looks good:

Fruit and vegetables prices increased 22.2%
Meat, poultry and fish prices increased 7.8%
Grocery food prices increased 13.7%
Non-alcoholic beverage prices increased 8.2%
Restaurant meals and ready-to-eat food prices increased 8.7%

ANZ put this down to a hard-to-solve cocktail of “extreme weather events, rising input costs, geopolitical tensions and ongoing labour shortages”, and doesn’t see it easing any time soon. (Worth noting that inflation also impacts the sky-rocketing cost of cigarettes, which have excise tax indexed to the CPI – hence a savage 7.2% annual increase in the price of darts).

The rent is, too

Cyclone Gabrielle destroyed homes across the North Island, further squeezing an already highly constrained market for housing. This helped drive the flow measure of rents (prices for new tenancies) up by 1.5% in March – the fifth-highest monthly increase since the start of the pandemic, 36 months ago. KiwiBank suggests that “the repair of damaged infrastructure will see the construction pipeline swell in the coming months. And shortages still plaguing the sector, particularly around labour, will likely be exacerbated by the rebuild.” Which is to say that despite signals they might have begun declining late last year, post-Gabrielle, construction costs, rents and even house prices are all likely to hold steady, if not start marching up again.

The worst thing is, we’re doing it to ourselves

Perhaps the most troubling part of all this is where inflation is coming from. When it first kicked in, during 2021, there was a wonkish ongoing debate between “team transitory” and “team permanent”. Team transitory argued that inflation was caused by a set of one-off Covid-related factors, to do with border controls and supply chain issues. Once those passed through, they believed inflation would quickly return to its normal low range. Team permanent thought inflation was going to stick around a lot longer.

There are few members on team transitory now, as New Zealand is now starting to display homegrown inflation – the kind of NZ-made product we’d much rather avoid. The distinction here is between “tradable” and “non-tradable” inflation. Tradable inflation is largely beyond our control – mostly fuel and commodity prices, and it is coming down, albeit slowly. Non-tradable inflation, though, is what we can theoretically control. It’s what Orr is trying to impact with his central bank interest rates – but is steadily rising.

As ANZ notes, high interest rates have not impacted the cost of what we sell to each other, and it is concerned that “there is a real risk that domestic inflation proves sticky at high levels, potentially necessitating another round of rate hikes after the Reserve Bank has held the OCR at its ‘watch, worry and wait’ level for a few quarters”. That WWW level is 5.5%, which we’re almost at already, and has been signalled as the upper bound of interest rates. Yet if making mortgages and other lending ruinously expensive still doesn’t get inflation under control, we might get another, even sterner talking to from Wellington’s scary finance dad, with even higher interest rates. All of which is to say that we have a very tense Thursday coming up, and seem a long way from being through the cost of living crisis.

Keep going!

You were going to buy it on Book Depository. Where do you go now? (Image: Tina Tiller/Getty)

BooksApril 17, 2023

Is Book Depository closing a good thing for local bookshops?

Shanti Mathias

Contributing writer

You were going to buy it on Book Depository. Where do you go now? (Image: Tina Tiller/Getty)

After the announcement that Amazon is closing Book Depository, Shanti Mathias talks to publishers and booksellers wondering what will step into that void.

When you opened the package, a bookmark would fall out. It was colourful – a spin on a book cover, perhaps, or a cute illustration of people reading. And as you welcomed that new book into your home, to be read or loaned or simply to adorn your shelf, there were probably hundreds of people around the country checking their letterboxes and finding the same. A dispatch from Book Depository of a book they wanted, for cheaper than they could get it anywhere else and – crucially – shipped for free.

“New Zealanders are awesome readers, we love to read local and international literature, but not every book is distributed in Australia and New Zealand,” says Claire Murdoch, publisher at Penguin Random House New Zealand, speaking in her role as a member of the Publishers Association of New Zealand (PANZ) council. Affordable international literature – as well as those cute bookmarks – was another reason for New Zealand’s love affair with Book Depository.

But the days of Book Depository, its ubiquitous bookmarks and alluring free shipping are now gone. Amazon, which bought the UK-based online retailer in 2011, announced this month that they’re closing the store on April 26. Thousands of book lovers will have to find somewhere else to shop. Is that good news for New Zealand booksellers?

“I think it is, actually,” says Tony Moores, owner of Poppies, a franchise with bookshops in Howick, Hamilton and New Plymouth. That said, he knows that “a lot of people don’t mind where they get the book from, they just want it.”

a young white woman looking nonplussed with bookshelves behind her — Book Depository meant the books just kept coming (Photo: Lucy Lambriex/Getty)

There are several reasons books might not be available in New Zealand, and which made Book Depository such an attractive option, says Murdoch. One is territorial copyright: authors don’t always sell, and publishers don’t always buy, global distribution rights, meaning a book published by a small publisher in the UK may have no-one who can distribute it in New Zealand.

The other is low demand. For a specialised engineering textbook, say, not assigned in any university but relevant to perhaps three people in New Zealand, there is no incentive for a publisher to distribute, or a bookshop to stock that book. “You need a warehouse and a sales team – there needs to be enough interest in that list,” Murdoch says. In some cases, bookshops can order these books for their customers, although they can take weeks to arrive from overseas. In other cases, especially with books in non-English languages, bookshops may not have relationships with the suppliers to get that book.

A lot of people buy a lot of things from Book Depository, but the site particularly focused on a “long tail” strategy, keeping small numbers of stock of books that weren’t particularly popular with the certainty that there would be people to buy them among their global customer base. The obvious people who are going to be most affected are people whose interest in books diverges from what is available in their country: people in countries like New Zealand who want books in Vietnamese or Spanish, and vice versa – people in Argentina or Vietnam who want books in English. People trying to buy self-published books from overseas will also be affected. “The free shipping made getting those books more economically viable,” says Murdoch.

An illustration of a woman holding a huge stack of books, so tall it's almost over her head. — Free shipping let piles of books just keep coming (Photo: Oksana Horiun / iStock via Getty; Design: Tina Tiller)

Without Book Depository, the obvious large retailer with decades of experience in bookselling is Amazon, but without a local branch, the shipping can be expensive. For book sellers like Moores, the end of Book Depository is a reminder that despite Amazon beginning as a bookshop, the company isn’t really focused on readers (or, for that matter, publishers and writers). “Amazon makes much more money selling other things – book pricing is relatively constrained,” Moores says.

While Book Depository was owned by Amazon, their exclusive focus on books, as well as effective branding – your eyes falling on their logo-enhanced bookmark every time you opened the book – helped them to project a sense that they were a shop for readers. With the promise of free shipping, those readers just kept coming back.

The company hasn’t given a reason for their closure, but the free shipping was probably its weak point, as well as the wider tech downturn. Sending physical objects around the world is expensive. “It’s not economical or ethical – in terms of the carbon it burns – to send single books around the world,” Moores says. Three years of Covid has disrupted supply chains and freight systems. Pair that with inflation and high cost of living around the world, and suddenly the slim margins that Book Depository operated on became unprofitable to Amazon while the company is making other cuts.

bookshop with the actual store name scrubbed out and replaced with "available at amazon" — With Book Depository gone, Amazon itself might make more aggressive moves into the New Zealand book market

Online retailers with similar models to Book Depository, making lots of books from overseas available, may also fill the gap. In New Zealand, this includes Mighty Ape, Fishpond and Booktopia – all of whom charge for shipping. Other alternatives are Blackwells, which has free international shipping (for now), Abe Books, and Better World Books, which includes former library books.

“I don’t know Mighty Ape’s market share, but they sell a lot of products – not just books,” Moores says. However, these providers will largely be ordering books from the same sources as local bookshops, so the price difference won’t be major. “When we order books for customers [from overseas], we’d rather have the sale than a big profit, so we often only charge a small handling fee and hope the customer will come back,” Moores says.

It’s also an opportunity for New Zealand publishers to acquire more international rights – and for publishers overseas to pay closer attention to New Zealand’s thriving books industry, Murdoch says. “Rights deals go both ways – this is potentially a moment for increased outward rights sales and outward book exports. New Zealander publishers may have more of an incentive to bring internationally published books to New Zealand, too, if people aren’t going to go and buy them on Book Depository.”

And while some people will migrate to other online retailers, and others to their local bookstores, there might still be a gap in the market for something new, offering a wider range of New Zealand and international books than a single bookshop or publisher can do alone. “We’re not just sitting on our hands,” Moores says. “We want people to be able to get the books they’re looking for, wherever they are in the country.”

‘Hutt Valley, Kāpiti, down to the south coast. Our Wellington coverage is powered by members.’

Joel MacManus
— Wellington editor