Thursday 21 July 2022

Petrol excise holidays and inflation

The extended petrol excise holiday is bad for a lot of reasons. But we shouldn't pretend it fights inflation. 

It results in a CPI level that is a bit below where it would have been, for the period that it is in place. Year-on-year changes in CPI are our going target measure for inflation. 

So think about things a bit harder.

Suppose the holiday is made permanent and land transport funding is permanently shifted from a user-fee basis to a general-tax-revenue basis. When the one-year anniversary of the petrol excise holiday comes around, we will again be comparing CPI figures that are set on like-for-like basis. The effect of the holiday in muting the underlying trend will be gone. 

Or suppose instead that the holiday ends in December. Come the March quarter, we'll be comparing a no-subsidy petrol cost CPI quarter 2023 with a no-subsidy petrol cost CPI quarter 2022, so we get a one-off jump from the prior quarter's artificial depression of the inflation figures, then we'll get an artificial jump in measured inflation when we start comparing a no-subsidy petrol cost CPI June 2023 quarter with the with-subsidy 2022 June quarter.

In either case, the Reserve Bank has the same job in fighting underlying inflation. It should look through the road use charge changes in either case, except to the extent that it flows through into other prices - and even that will be transitory. 

My column in Newsroom this week, reminding that RBNZ in 2010 helped keep inflation expectations anchored by posting inflation projections with and without the effects of the 2010 GST increase. 

While the petrol excise holiday does affect headline Consumer Price Index results, it does not really affect the inflation that the Reserve Bank should care about in setting monetary policy. The Consumer Price Index will be somewhat lower than it would have been for a bit longer. But inflation remains largely unaffected.

Consequently, we should look through the effects of the policy when looking at headline inflation. And if we do, then you need to look back 34 years, to March quarter 1988, to find a higher inflation figure.

When considering the petrol excise changes, it's helpful to reflect on the GST increase in 2010. In 2010, John Key’s National government increased GST from 12.5 percent to 15 percent. Overnight, on 1 October, the price of everything went up. Something that had cost $112.50 on 30 September would cost $115.00 the next day.

But was the move inflationary?

The Consumer Price Index would certainly be higher than it otherwise would have been. For one year.

Annual inflation is the percentage change in the CPI compared to the same quarter in the previous year. So long as each quarter’s CPI was compared to a CPI figure before the GST increase, annual inflation would look higher than otherwise. But by December 2011, inflation would be measured against a baseline with a higher GST rate.

So unless something else changed, the GST increase would not affect ongoing inflation.

The Reserve Bank worried about whether that ‘something else’ might matter.

Monetary Policy Statements in 2010 talked about the potential for the CPI increases to pass through into wage increases, which could affect ongoing inflation figures. At the same time, energy began facing a carbon price in the Emissions Trading Scheme, which would also affect headline CPI. And a sequence of hefty tobacco excise increases began.

So the Reserve Bank checked with industry to see whether those CPI increases were feeding into wage settlements, and they checked against surveys of inflation expectations. They also looked at what happened in the last GST increase.

They saw little cause for concern, noting that “monetary policy would act to offset any pick-up in medium-term inflation expectations.”

But the Bank also provided important assistance in keeping inflation expectations anchored.

The December 2010 Monetary Policy Statement provided measures of both CPI and projected future CPI. One forecast included the effects of policy changes that affected CPI; a second stripped out those effects.

No comments:

Post a Comment