Pressure now on Reserve Bank to raise interest rates

For the first time in decades, this year’s Budget was delivered in the menacing shadow of inflation.

Inflation is a scourge: like a cancer on society.

When the prices for most goods and services are rising, each dollar we have buys less.

Inflation robs from people on fixed incomes or who cannot protect their savings. Inflation also causes havoc in financial markets (including crypto).

The stimulatory response in the last two Budgets, combined with the Reserve Bank’s loose monetary policy of near-zero interest rates, protected us from an economic disaster caused by Covid. But it ignited the inflation we are experiencing now (yes, exacerbated by rising oil prices from overseas, etc).

Once inflation is established it can be very hard to stamp out.

When preparing this year’s fourth "Wellbeing Budget", the Minister of Finance, Grant Robertson, was faced with a dilemma.

On the one hand, he did not want to stoke inflation by further stimulating the economy by ramping up government spending again (bear in mind, the government makes up about a third of the whole economy).

On the other hand, he wanted to do something to ease the pain that inflation is causing.

Mr Robertson gifted a $350 "cost of living payment" to more than 2million adults earning less than $70,000 — in addition to the recently resumed winter energy payments to superannuitants and people on income support.

An astonishing 81% of adults will be on these benefits.

As well as the Budget’s cost of living package, most of the other even bigger-ticket spending is for responding to climate change and bolstering our about-to-be reformed health system.

Net new operating spending is $5.9 billion a year.

Inflation is likely to continue and probably increase. Get ready for even higher prices (and wages too).

The pressure is now on the Reserve Bank, whose main job, arguably, is fighting inflation, to raise interest rates more.

■  Paul Hansen is a professor in the department of economics at the University of Otago.


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