Inflation rate driven by external factors

Canterbury Manufacturers’ Association.

20 July 2006.

The Canterbury Manufacturers’ Association says that the inflation rate figure of 4 percent released this week was due in large part to external factors beyond the Government’s control that could remain for several months, if not at least a year to come.

“The rising costs of oil and travel are the principal contributors in pushing inflation rate higher which is another poor result for the New Zealand economy on top of those we have already seen”, says Chief Executive John Walley.

Mr. Walley says that New Zealanders must be prepared for oil prices to remain strong in the months ahead. “Oil prices have been rising over the past several months and there is little sign that they will ease, at least in the immediate future, given the situation in the Middle East. There is a wider geo-political aspect underpinning rising oil prices than what is currently happening in Lebanon. Israel and Hezbollah may call a ceasefire in the coming days or weeks but the instability in the Middle East may last for months if not years”.

“Countries like New Zealand increased their dependency on Middle East oil supplies over the past 25 years, when apart from the first Gulf War, there has been a stable and steady output of oil from the region. But this picture has changed since 2003. The invasion of Iraq and tensions between the Western states and Iran and Syria have heightened fears in financial markets as to the supply reliability and resulted in ever increasing prices,” said Mr. Walley.

Mr Walley says that oil price is a strategic concern for New Zealand far beyond vehicles and threatens the life blood of a developed economy – electricity availability and price. Greater dependence on hydrocarbons for electricity generation is something New Zealand should avoid as rising international oil prices makes electricity generated from renewable sources all the more attractive. Looking forward, the choice of large hydro is ever more attractive in both price and minimal environmental impact.

“New Zealand has sufficient renewable energy sources to lessen the impact of rising oil prices”, says Mr. Walley. “Extending our base load resources of hydro with perhaps some coal and the balanced introduction of wind generation would do much to improve supply reliability and reduce the cost of electricity in New Zealand. Greater dependence on oil, amplified via exchange rate shocks does not seem that smart.

Mr. Walley says that the export potential of local hydrocarbons can be maximised provided we fully exploit the renewable generation assets available to us.

ENDS

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