Caroline Ritchie: Strong Kiwi helping all except primary industry

Difficult to concentrate last week with all the pageantry going on.
One thing did strike me as I shopped online and offshore for Royal Wedding souvenirs and that was our rate of exchange. Nobody ever seems completely happy with the level of the New Zealand dollar against the US dollar, except maybe the monster carry-trade players. Primary industry, and in particular agriculture is currently suffering against a strong Kiwi. But the rest of the country should be counting its blessings.
Petroleum and petroleum products account for the largest whack of our total imports at $6.4 billion last year. We actually pay for petrol, and much more, in US dollars. If you thought the price of a tank of premium was high now, consider what it would be if our dollar only bought US40 cents as it did in 2000 to 2001. We'd be paying around $5 per litre. A much weaker currency would see basic items priced out of reach of stretched consumers and would load a big burden on an already stressed economy. Yes, the exporters would be significantly happier, but the rest of us would be heading into serious cost blowouts for necessities.
If the commodities boom settled down and petered out then that would take the pressure off a bit. However, the chances of oil back at $50 per barrel and cheap cheese seem like distant memories. And yet the vice-chairwoman of the Federal Reserve is picking the current commodities boom to fizzle out this year and continues to resist the theory that commodities are causing the return of inflation.
The crux of this argument lies in how inflation is measured, which is an old financial chestnut.
Core inflation is measured with commodity prices excluded. The difficulty here is that now, these are the very things causing real price pressure in the pocket of the consumer.
Another way of saying it is that the printed level of inflation may often be below the reality in times of lagging wage growth and higher prices.
Which means things are tougher than they appear.
For those wondering why on earth the CPI would exclude the very basics that sustain modern life, it does so to avoid short-term resource and commodity price shocks. This is all well and good when these spikes are short and transitory.
But, say the demand for commodities, at least in the emerging Asian economies, does not abate readily, and the current supply squeeze continues on. Two fairly likely scenarios over the medium and long term in the opinion of this author, although it disagrees with the short term prediction from those on high.
Real, on the ground inflation will be higher than we think, and it's coming soon.
Our high Kiwi dollar, and the fact that you and I are actually small term currency players at the fuel pump and in the supermarket, is not to be taken for granted.
Caroline Ritchie is an NZX Advisor for Forsyth Barr in Napier and holds an NZX Diploma, BCom and BSc. For sharemarket advice contact her on (06) 835 3111 or caroline.ritchie@forbar.co.nz.
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