Petrol $3 litre

Just after Christmas, my mate Steve was in the market to buy a tractor which eighteen months ago, would have cost him around $50,000.

Guess what the asking price is now?

$150,000!

No bull.

But inflation was still warming up because last week, petrol prices hit $3.00 a litre in New Zealand and went as high as $4.90 in South Auckland.

As expected, the blame was quickly leveled at Russia’s invasion of Ukraine.

But that’s not the problem. Russia has only accentuated it.

The problem started two years ago when central banks around the world began printing cart loads of cash following the pandemic. Not that they had much choice.

Superannuants were allowed to raid their super funds to buy stuff they didn’t need, while homeowners started taking free money out of their homes (equity) just because they could.

Consequently, record low interest rates and endless stimuli lead to demand side inflation.

i.e. excess purchasing power put a rocket under asset and commodity prices (fuel, energy, gas, consumables and building materials) and now inflation is at a 40 year high.

But that’s only one side of the problem.

The other side is what’s called supply side inflation.

Meaning, because borders have been closed, supply chains have broken making it almost impossible to import resources such as labor, materials, motor vehicles, etc.

The shortage of semi-conductors is the worst because we’re so reliant on technology to run our lives.

But unfortunately, there’s more pain to come.

For the past two years the Reserve Bank and the Federal Reserve have been telling us interest rates wouldn’t go up until 2024, even though inflation was beginning to scream.

”Inflation is only transitory”, they scoffed.

No it’s not and it never was.

Inflation far from temporary and on Wednesday night the Federal Reserve finally admitted inflation is out of control by hiking interest rates two years ahead of schedule.

Did you hear that? Two years ahead of schedule.

And there’s more to come, which means it will be tough for borrowers. i.e. higher living costs plus higher loan repayments.

And now there’s suggestions the government should cut taxes or provide more hand-outs because voters are feeling the pain.

That would only throw more fuel on the inflationary fire. The worst outcome of all.

It took two years to get to this point thanks to ultra-low interest rates and lots of cheap money swashing around. It’s alos possible it will take just as long to turn it around.

But to achieve that, we need a tractor with some serious horsepower.

Hello interest rates!

Have a great weekend!

Adam