It has been a long time coming and inflation has caused much damage. Everyone who cannot match rising prices with increased income is poorer.
One of the most insidious effects is how inflation provides cover for price increases when they are unjustified, a form of profiteering. Inflation can be used as an excuse for price rises even if a company’s costs have not risen much at all.
Inflation also easily spirals as costs feed on each other.
It is a difficult beast to tame, sometimes turning into ‘‘stagflation’’. This is when the economy remains in recession while inflation continues. The country has no or slow growth and rising unemployment but also inflation. It was a plague in the 1970s. It is a nightmare to overcome and was recently seen as a real possibility.
By rights, a recession should knock back inflation. Workers, fearful for their jobs, cannot seek much in the way of wage increases as unemployment rises. Spending falls as people become more cautious and their money does not go as far. Businesses must meet the market and cannot increase prices.
New Zealand and much of the rest of the Western world are still reaping the consequences of lots of money sloshing around after Covid. Governments splurged and increased debt and reckoning followed. That, with a spur from supply chain issues and Russia’s invasion of Ukraine, put a fire under inflation. Cyclone Gabrielle also helped spike vegetable prices last year.
History is littered with times when money in effect (and sometimes literally) was ‘‘printed’’, destroying its value. Germany’s 1920s Weimar Republic, Zimbabwe and several South American nations witnessed extreme examples.
But inflation on a much lesser scale also eats away at a currency’s worth.
Tradeable inflation (roughly imported costs) was earlier blamed for much of the increase during the period when inflation was above 7%. While international inflation was large, domestically generated inflation (non-tradable) was also.
Tradeable inflation in the year to June was only 0.3%, in contrast to domestic inflation of 5.4%. The focus, then, is on internal inflation.
The Reserve Bank’s imposition of high interest rates is cutting demand and finally reducing domestic inflation. Mortgage rates above 7% are putting pressure on household budgets.
Unfortunately, insurance (up 14% annually) and rates (9.6%) are largely immune from such forces. Homeowners and landlords have no choice but to pay rates and insurance. Downward market pressures do not work.
Rents are up 4.8% and power bills have jumped as well. Thankfully, food prices have been falling. After staggering increases, the cost of building is at last showing signs of easing. The building slump is having an impact.
Banks, looking forward, have begun to tweak mortgage rates down. They are expecting the Reserve Bank might see fit to bring an official cash rate cut forward into this year.
Kiwibank economists have said inflation is likely to fall below 3% in the September data. They also think rent rises, increasing at their fastest since the late 1990s, are likely to wane as the economic backdrop continues to deteriorate.
There is always the danger of overshooting. Too many businesses go under, and too many people lose their jobs. Unnecessary damage is caused rather than hard times causing a partial clean-out and promoting efficiencies.
Fears the government’s tax cuts, due from the end of this month, will prolong inflation may prove unfounded. The ailing economy by August, as winter drags on, may need a small stimulus from tax-cut spending.
All the while, the government is busy making changes, cutting costs and alienating different parts of the community. There is, however, the prospect of tamed inflation, falling interest rates and a slow and steady return in confidence. Even though the Reserve Bank has been doing the dirty work, the government will use those better times to create a plausible narrative for the 2026 election.
