Inflation’s nasty sting

Reserve Bank governor Adrian Orr was not overstating inflation concerns when this week he said "we’re not in a great place right now".

The annual inflation rate has soared to 6.9% mocking the bank’s 1% to 3% target and presaging various ill-effects.

These are under way before our eyes.

The cost of food, rent, rates and all the other essentials is rising fast, and the value of money is falling.

Mortgage rates are climbing at the same time as savings are eroding.

Once embedded, inflation spirals.

It makes sense to buy now if possible because tomorrow the purchase likely will be more expensive.

Big wage increases are required to try to keep up, and that keeps the corkscrew twisting.

Somehow, this spiral needs to be broken.

The traditional method is to raise interest rates to dampen demand. A household paying an extra $1000 a month on the mortgage has less to spend, less to stimulate the economy.

Dr Orr last bumped the official cash rate by 0.5 percentage points, and his official guidance is that more hikes are expected over coming months.

He might point to high inflation in the United States and Britain (8.5% and 7%), the now dreaded supply-chain issues and the war in Ukraine. Effects from China’s battle to eliminate Covid are further reasons for international inflation.

Finance Minister Grant Robertson blames the overseas influences, while National condemns government spending for "throwing fuel on the fire".

Australia’s rate, 3.5%, Singapore (2%) and Japan (1%) are used to claim New Zealand could have followed a different path.

It is likely that the truth is somewhere in the middle.

New Zealand’s $55 billion of "quantitative easing" — printing money — was per person among the highest, and Dr Orr was probably too slow to pump the brakes on money supply and interest rates.

Whatever the "infrastructure deficit", the Government has been relatively free with its spending. The fires have been stoked and the extra $6 billion spending allowance due in next month’s Budget will not help.

Nor does the drip, drip, drip of extra costs on businesses.

Increased government spending never surprises. Governments face many pressures from so many worthy causes and programmes, so much demand.

The powerful State unions will also always be making cases for their "poor" pay to be improved.

Expected further elevated application of industrial muscle from that quarter with inflation, of course, being cited.

This is not to say National’s answer of tax cuts is going to help.

More money in the hand will be needed to compensate for more costs, but more spending whether by the Government or via individuals has the same stimulatory effect.

Cycles are the nature of market capitalism, the least bad system we have.

There are periods of growth and expansion and then crashes or "corrections" — perhaps about each 10 or so years.

That leads to adjustments and changes. It creates many losers and, at the same time, new beginnings.

For a while, the world seemed to believe it could create money with impunity.

The traditional rules of economics needed revising, we were told.

This is proving false. There was no free lunch.

Inflation is taking hold and it will take abrupt adjustments to bring it under control.

Inflation is making the renter, the mortgagee and the saver all poorer.

We could well be headed for a period of lower standards of living.

Fortunately, our high employment rate is a partial cushion. The backlog in demand will help carry us on for a while, ameliorating some of the worst immediate impacts.

Ironically, it is a possible collapse in demand that could derail inflation and, in turn, halt rising interest rates.

Generations that have not seen significant inflation are feeling its sting.

They will be surprised by how disruptive it can be.

Hopefully, New Zealand can muddle through and then progress.

But, as Dr Orr said, "we are not in a great place right now".

Comments

Consider regulation of electricity companies and the rental market.
Means test superannuation.

But, as Dr Orr said
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Adrian Orr is not a "doctor" and doesn't hold a doctorate.

According to the RBNZ website:

"Mr Orr graduated from the University of Waikato in 1983 with a Bachelor of Social Sciences, majoring in Economics and Geography. He also has a Master of Development Economics from the University of Leicester, England, graduating with distinction in 1985"

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