Food prices are falling, so why aren’t we celebrating the end of inflation? - Liam Dann

The costs of takeaways and restaurant meals has soared in the past couple of years. Photo / 123rf

OPINION

Food prices have fallen... just a bit, but it’s a start. Led by a big drop in fruit and vegetables, the overall cost of food fell by 0.6 per cent in February when compared with the month prior.

We should be cheering right? Smashed avocado toast for all!

Hang on, they don’t call it the dismal science for nothing. Economists were not cheering. In fact, they quickly looked through the silver lining of last week’s price data package and found a great big cloudy centre.

The annual increase for food prices was just 2.1 per cent - almost bang on the Reserve Bank’s target for overall inflation in the economy.

Fruit and vegetables were down 9.3 per cent over the year, although that’s not entirely surprising given that local supply was hit hard by flooding and Cyclone Gabrielle in January and February last year.

But they were also down 4.6 per cent (month on month) compared to January. The February data also showed falls for meat, poultry and fish, as well as general grocery food, with both categories down 0.5 per cent compared with January.

This all sounds very promising. You’d be forgiven for thinking it was good news.

But last week’s food price news provided a great example of how inflation flows through an economy... and why the last bit is so sticky and tough to beat.

Which, if we stay on the extrapolation train for a bit, tells us something about why the Reserve Bank isn’t planning to cut the official cash rate any time soon and why your mortgage rate is staying so high.

You don’t have to be a fine-dining connoisseur to know the cost of eating out has soared in the past couple of years. Just taking the kids to the local food hall for noodles has well and truly busted through the $100 price point. And you won’t get much change from $20 if you go to a bakery for a pie and custard square these days, particularly in the central city.

According to Stats NZ, the cost of restaurant and ready meals (takeaways) rose 8.9 per cent in the year to February 2023 and, in the latest data, increased 6.9 per cent in the year to February 2024.

This is bad news for people like me who enjoy indulging in a wide variety of deep-fried and stir-fried foods.

I suppose it might be good news for my waistline, which goes to the point that eating out is at least a discretionary expenditure.

It’s something economists call price elasticity. Goods are described as either elastic or inelastic, depending on how much the price can move before demand falls. Some good examples of inelastic products are things we people are addicted to like booze, tobacco and meth. And food for that matter. We can’t exactly give the stuff up.

There’s been a lot of work done on the price elasticity of tobacco because governments have been trying to tax it out of existence. It’s a testament to the power of nicotine that it takes huge price movements just to get small falls in demand.

Eating out, and drinking out for that matter, are a bit different because we can do that at home for at least half the price. I suspect for the next few months, at least, more people will be doing just that.

But it creates a terrible dilemma for hospitality businesses who find themselves forced to test the limits of what people are prepared to pay.

There is only so far and so long they can absorb cost increases before they go backwards and there’s no point staying in business. But if they pass on all the costs, they may price themselves out of the market anyway. It’s Hobson’s choice.

If you have low debt and enough cashflow to pay the staff and keep the lights on, then running at a loss might be an option - but not for long.

The trouble for many businesses is the uncertainty about how long inflation will stick around and keep interest rates high.

One suspects that in the wake of pandemic restrictions Kiwis were determined to get out and enjoy eating and drinking in public again. We accepted higher prices at the front end of the inflation cycle because everything was going up, including wages, and interest rates were still low.

As the price of raw food ingredients falls, it helps. But the reality for most restaurants and fast-food outlets is that the real cost pressure is coming from wages, rent, power and rates.

At least avocados are cheap at the moment. Photo / 123rf

This is the kind of inflationary pressure that can become more firmly embedded in an economy. It is harder to get out of an economy without inflicting some serious monetary policy pressure on demand.

That’s happening at a pace now as mortgage holders roll off low fixed rates and with the public sector and corporates in cost-cutting mode, by putting a lid on wage rises and slashing jobs.

The data worrying economists included a bunch of other things now included in Stats NZ’s selected price index. While we wait for the full consumers price index every three months, the selected price index captures about 45 per cent of our spending every month.

As well as food, it includes booze and transport and accommodation costs. The data reveals sizeable rises in the cost of airfares and overseas accommodation.

Again, there’s some seriously discretionary stuff in there. On a personal level, we can take control of our spending and inflation will begin to become much less of an issue.

But at the macroeconomic level, it all counts. Economists at Westpac have now raised their inflation forecasts for the March quarter and others like ANZ have warned of upside risks.