Briefly in this deep-dive below on the political economy of administered inflation below:

* The Government was elected in 2023 on a wave of public revulsion at inflation, which voters blamed on the then-Labour Government. Initially, inflation fell through 2024 because global oil and food prices had fallen in the previous 18 months. But it has come surging back in 2025, thanks to another burst of global food price inflation and a surprising cascade of new and higher Government and council fees, fines, rates and charges.

* This administered inflation is immune to higher interest rates and was caused by the Government’s late-2023 decision to cut capital spending and budget deficits in order to take pressure off inflation and mortgage rates. Instead, this ‘belt-tightening’ created the exact opposite of reducing inflation. Imposing new fees and rates on consumers to replace Government-funded capital investment has added the worst surge in administered inflation in 35 years, as the Reserve Bank pointed out in its Monetary Policy Statement last month (Chart 2.16, Page 20). The chart is below.

* Now the public have noticed the latest inflation surge too and have started blaming the National-led Government for it, to the extent of telling Ipsos NZ in a poll published over the weekend that they trust Labour more than National on the cost-of-living/inflation issue (Page 18). The chart is below.

* But this is just the beginning. A whole raft of new entrance fees, road tolls, congestion charges, water charges, road user charges, user-pays levies, fines are set to be imposed in the coming years as the Government sticks to its strategy of replacing debt-funded public investment with private-funded investment that is serviced by user pays charges. In effect, this is a systemic inflation shock administered by a Government that is pursuing an ideology of reducing the size of the state below 30% of GDP (from around 35% now), and getting its own measure of net debt bending back down towards 30% (from around 42% now).

* The problem for the Reserve Bank is that it can’t easily ignore this systemic shock and let inflation run higher than its target, so it will have keep interest rates as much as 150 basis points higher than it would have without the shock. That’s partly the Reserve Bank’s own fault. It decided to ignore capital costs in its measures of inflation when it was set up as independent inflation-targeting central bank because it created a risk of a feedback loop that meant higher interest rates generated higher inflation, forcing interest rates to go even higher.

* For example, our Consumer Price Index (CPI) measures don’t include mortgage, business or Government interest costs. But these still-ignored costs are now turning into a CPI inflation shock that is definitely not ignored because central Government fees and charges and council rates are included in the CPI.

* In turn, this raises questions about whether the Reserve Bank can avoid running interest rates tighter than necessary and in a way that forces it to raise unemployment to compensate for a structural and ideological decision by the Government. Workers who lose their jobs because of Government cutbacks would be then doubly punished with higher interest rates and an even harder job-hunting task because of the way the Reserve Bank Act forces the Reserve Bank to prioritise CPI inflation of around 2%.

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The Government administered an inflation shock

A passing comment about the need for higher prices from Air NZ CEO Greg Foran in an interview with Lisa Owen on RNZ Checkpoint on Thursday night emphasised to me again just how much of our economy is driven by administered prices from central and local government, regulated businesses and monopolies, rather than prices being decided by the forces of supply and demand in a free market that the Reserve Bank is tasked with controlling and assumes.

Foran said passengers should expect fare increases of at least 5% in the coming year because the airline’s costs had increased. Not fuel costs, which have fallen 12%, but equipment, labour and landing charges, he said.

“Airport charges over the last five years, and I'm talking all airports here, are up 55%. So that's double the rate of CPI. They're up another 6% this year. That means we will spend $417 million on airports this year.

It's our fourth most expensive cost line in the business. I can't absorb those costs. When you get on a flight to go from, say, Auckland to Wellington, and let's say you happen to do get a good fare and that fare's $100, about $62 of that is simply to pay for landing charges in Auckland and Wellington.

I think Air New Zealand is going to have to look at moving fares up by at least 5% so that we can continue to invest in this business and ensure that it's safe and resilient.” Air NZ CEO Greg Foran via RNZ Checkpoint

Aside from questions about how much competition there is in domestic aviation and that landing charges are administered and based on estimates of capital investment costs and higher capital returns, Foran’s mention of landing charges reminded me of this January 17 announcement that most missed from the Civil Aviation Authority. It announced it would increase domestic passenger landing fees by 146% and its domestic security fee by 66% from July 1. It increased international fees by 70% and other fees by 10%. This was to reduce the Government’s effective subsidy for Civil Aviation built up since 2017 and through Covid. The fee increases meant the Government would have to borrow $51 million less over the next three years.

That made sense for a Government hoping to reduce interest costs by a basis point or two because of less borrowing. The problem is that capital management decision is now turning up in the Consumer Price Index, which the Reserve Bank has to react to with higher interest rates than would otherwise be the case.

This is just the latest case of that capital expenditure and debt reduction decision flowing into higher consumer prices, including:

* road user charges for electric vehicles to reduce borrowing for road repairs;

* a $50 hike in car, motorbike and trailer registration fees to reduce borrowing for new roads by $530 million;

* hikes in fuel taxes by 22 cents a litre by the end of the 2029 parliamentary term to reduce borrowing costs for roads;

* a 14.8% increase in passport renewal fees from May 1 this year;

* an almost trebling of the international visitor levy to $100 from October 1 last year;

* Increases in court and legal fees across the board by the Ministry of Justice;

* increases in work and residency visa fees of up to 256% from October 1 last year;

* increases in customs fees to reduce borrowing by $70 million from July 1 this year; and,

* a tertiary education fees increase of 6% for calendar 2025, treble the 2% midpoint of the Reserve Bank’s 1-3% target range.

These are just the ones I could recall and find this morning. I welcome your additions in the comments below.

This is how administered inflation cascades down. It is on track to get worse, with the Government planning to impose congestion charges and road user charges.

Quotes of the day: ‘We’re worried about administered inflation’

“Recent increases in food prices and administered prices have contributed to near-term inflationary pressure.

“The Committee noted that increases in administered prices, such as local council rates and some energy charges, have contributed to higher-than-otherwise non-tradables inflation. Some (Monetary Policy Committee) members emphasised that these prices represent rising costs for businesses and may spill over to generalised non-tradables inflation, particularly in the near term.

“Inflation in administered prices is contributing significantly to non‑tradables inflation, and at 10.8 percent in the year to the June 2025 quarter is at its highest level since at least 1990.

“We expect administered price inflation to ease over time in line with lower general inflation, but inflation in this category may remain higher than other non‑tradables categories for some time.” The Reserve Bank in its Monetary Policy Statement last month.

Numbers of the day: 10.8%, 12.2% & 8.4%

* 10.8% is the annual rate of administered inflation in central and local government fees and charges in the year to the end of June.

* 12.2% is the annual rate of inflation of local authority rates and payments. Councils have blamed freezes in capital grants by the Government for transport, water and housing for their rates increases over the last year.

* 8.4% is the annual rate of inflation of electricity prices, which are administered by the three state-controlled gentailers (Meridian, Genesis & Mercury) and Contact, along with lines companies who have prices regulated by the Commerce Commission, which takes into account higher interest costs and extra capital investment.

Charts of the day: Administered inflation is not popular

Timeline-cleansing nature pic: Exposed roots

Ka kite ano.

Bernard

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