In an interesting speech by the RBNZ governor Alan Bollard we are told that everyone needs to play their part during the economic crisis. Specifically he stated:
We would hope that the electricity industry does not take advantage of its market position and keep increasing rates, that local authorities realise they need to set rates increases below inflation for a change, that the construction materials industry respond to much weaker demand, that the food industry react to lower international commodity prices with price cuts, that petrol companies keep cutting forecourt prices, that the transport industry pass on fuel price cuts, and that the banks pass on interest rate cuts. Only then will all these firms be playing their proper role in New Zealand’s recovery.
Now, putting the hard word on industries that do not face market pricing (like local councils) is fine – but attacking businesses for setting prices in their own interest – what the hell!
Firms aren’t passing on costs because they aren’t. If they had increased prices as strongly as cost pressures demanded on the way up then the inflation figure would be a lot worse than 5.1!
Think of it this way – if businesses are pricing “too high” they will face a situation where prices are “relative elastic”. Then it is “in their own interest” to cut prices. If they aren’t doing so, then prices aren’t too high, and if the RBNZ is really worried about inflationary pressure they should batter away with their own instrument instead of making arbitrary calls about “sharing the pain”. If there is a competition problem, complain to the commerce commission, otherwise stop trying to create scapegoats because of the fear surrounding a potential policy failure!
Other comments: Inquiring Mind, Rates Blog.
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