[comment caption=Do you plan to curb your spending?]New Zealand households have to start making tough choices about their spending, Berl senior economist Ganesh Nana says.
The Reserve Bank's policy of targeting inflation had failed and that meant New Zealanders had to make hard decisions about what they spent money on.
They should not expect wage rises to compensate for rising prices, he said yesterday.
Wage rises should be accompanied by productivity gains.
The country had to adjust to higher prices and adjust its priorities accordingly, he said, because nothing the Reserve Bank did would affect food prices or the price of petrol.
"Inflation targeting has failed the needs of the New Zealand economy.
"That the Reserve Bank is prepared to accept four consecutive years of negative or nil employment growth is clear evidence that New Zealanders are paying a high price indeed for the inflation control and targeting focus of economic policy," he said in an interview from Wellington.
Dr Nana was responding to questions regarding yesterday's Reserve Bank monetary policy statement - one of the gloomiest in recent years.
Reserve Bank governor Alan Bollard kept the official cash rate at 8.25% and projected annual inflation to peak at 4.7% in September.
The central bank projected little economic growth this year and only a modest recovery thereafter, largely reflecting a weaker household sector.
It predicted house prices would fall 13% during the next three years.
Once rising inflation was taken into account, the real drop would be more like 22%.
Government spending and personal tax cuts would provide some offset to the lower growth but also add to medium-term inflation pressure, Dr Bollard said.
Dr Nana was not impressed by the tone of the statement.
Describing inflation as a pay packet not going as far as it used to, Dr Nana said four years of nil job growth meant job reductions.
The notion that all inflation was bad and must be killed at any cost was wrong because the costs this time were jobs.
The Reserve Bank was making it hard for businesses to create jobs and had got it wrong when dealing with inflation.
The policy might have been correct 20 years ago, but was wrong now, Dr Nana said.
Dr Bollard did indicate that a cut in interest rates was possible towards the end of the year, provided inflation returned to the 1% to 3% band on average over the medium-term.
However, a key to ensuring inflation remained anchored at low levels was that wage and price setters did not alter their pricing behaviours in response to the near-term price shocks.
Engineering, Printing and Manufacturing Union national secretary Andrew Little said telling workers to lower wage claims showed the current method of controlling inflation was inadequate.
"Rather than the single blunt tool that is the official cash rate, we need a variety of ways of targeting particularly inflationary parts of the economy or New Zealand workers and exporters are only going to continue to be punished for situations beyond their control."
