War tariffs and oil - is this the next turn of the doom cycle?
Sunday, 26 July 2026
Vernon Small is a former Labour Government advisor and journalist.
OPINION: Here we go again.
Poised on the downslope of one economic crisis looking apprehensively up at another.
Just when, for the umpteenth time, it felt like the worst of the economic woes were behind us and forecasters were daring to predict stronger growth and falling inflation, we are back in the doom loop.
The US-Iran war is escalating and spreading, oil prices are soaring and US president Donald Trump is throwing tariff tantrums.
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Finance Minister Nicola Willis and her colleagues were mostly right to label Tuesday’s 4.1% annual inflation figure a “Trump spike” reflecting the big impact of the international oil shock since the start of the Iran shooting war at the end of February. Mostly right, because there were also big rises in some domestic-driven prices, including electricity and council rates.
The June quarter figure may yet represent the peak of the current round of inflation, but the darkening clouds in the Middle East are already hinting at a second oil price-fuelled “Trump Spike” later in the year.
Who would be a politician seeking re-election in these times?
After rumbling on at a lower level for weeks, the war this week took a much nastier turn - not just with an escalation in strikes and deaths in Iran and at US bases, but also with the Iran-aligned Houthis in Yemen attacking a second oil exporting choke point in the Red Sea.
That has seen the benchmark Brent Crude contract moving inexorably higher, leaving behind the low US$70-a-barrel range and inching towards the mid $80s, then over $90 and then quickly breaking through the US$100 mark on Thursday and Friday as the impact of the Houthis’ actions took their toll.
That is still well shy of the US$110-plus price it reached a couple of months ago. And in the interim, international markets have adjusted, with higher production from other countries and fewer signs of distress, including from the countries where we source our refined fuel.
But taking all that into account and setting aside Trump’s return to his one-trick tariff happy-place, including a 50% impost on some Canadian goods, a threatened levy in response to wildfire smoke drift, and the shift on Friday to a baseline 12.5% tariff (from 10%), things are still worrying for the economy and for the Luxon Government.
As they used to say, confidence arrives on foot and leaves on horseback. (Somehow, “confidence arrives on foot and leaves in a Ferrari” doesn’t have the same ring to it.)
But however you couch it, you sense the Government can sense it.
On Thursday Willis indicated she was thinking of extending the extra in-work tax credit for working families, worth up to $50 a week, brought during the worst fears about the oil shock.
As designed, the payment would have ended once petrol prices were sub-$3 a litre for four consecutive weeks. That test is likely to be met in the next few days, albeit many service stations are holding prices just a few cents below the $3 mark.
The worry for the Government is that the criterion to end the payment will cut in just as prices at the pump surge off the back of the latest war news.
Dropping any suggestion $3 is a hard-and-fast trigger is a no-brainer. Flip-flopping the payment through a period of heightened uncertainty makes no sense for businesses or consumers and certainly not for a government trying to show it has a steady hand on the wheel and an appreciation of cost-of-living pressures.
More interesting is whether – and when – the Government reaches into the $450 million slush fund it set aside in the May Budget to further address household pain if economic conditions remained sour.
It will surely be “when” given the need closer to the campaign for National to push back against Labour’s series of small but electorally appealing “cost-of-living” adjustments.
Which leaves how the Reserve Bank will react after its first tightening to 2.5% on July 8 and its signal more increases are on the way.
A further bout of oil-driven inflation will put the central bank back on the horns of its inflation-busting dilemma.
What is its best course of action – or perhaps more accurately, how quickly should it respond - when inflation is rising, due to an external supply shock which crimps the economy?
Continuing to tighten quickly would, by design, further slow the economy and put more people out of work on top of the job losses and recessionary impact of the fuel price rises themselves. It’s hard to see the merit in pushing up borrowing rates to curb demand across the economy in response to an inflation increase that is not caused by excess demand.
That is less of a stark choice with a dual inflation-unemployment mandate as operated by the US Federal Reserve, Australia and NZ under the previous government.
If tariffs and the current oil price surge continues, all eyes will be on whether the RBNZ sticks to a tightening track or eases back.
Ironically enough, for its own survival the Government that so ardently reimposed a single inflation-busting role on the bank might be hoping it takes an easier stance over the next few months.
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