Now, when food and petrol goes up, that’s inflation. In fact it’s most of the current inflation: out of 3.4%, 0.9% is from petrol and 0.9% from food. The Reserve Bank has a target for inflation of 1-3% over the medium term. When it sees inflation rising it puts up interest rates to get inflation down in the target range. This â€˜inflation targeting‘ is meant to work by encouraging people to save, not borrow, and take money out of people’s pockets through higher mortgage rates (giving that money to the owners of foreign banks). This takes money out of circulation, reducing consumer demand to match supply. Bye, bye inflation. In theory.
Problem is, the demand for food and the demand for petrol is not going to drop we need just as much no matter what the price. Even if demand did drop a little in New Zealand, the price would keep rising because the market is international. So, our incomes are tightened by the rising prices. Then the Reserve Bank makes it worse by lifting interest rates. That has no effect on inflation, so the Reserve Bank lifts rates again and keeps them up.
The only way to bring overall inflation down is to cripple other spending by forcing us to put more and more money into food, petrol, and housing. But doing that means no-one wants to buy anything, strangling the rest of the economy, and all the while inflation stays up because it’s international. It’s a stupid situation: the Reserve Bank’s inflation targeting punishes Kiwis and the New Zealand economy but can’t fix the underlying causes of inflation.
What’s the solution? Fix inflation targeting. New Zealand was the first country in the world to adopt the practice, during the rightwing economic revolution, and we remain the only country in the world that only considers inflation, not things like growth and jobs, when setting interest rates and looks at all inflation, not just the domestic stuff that interest rates can actually affect. We need to join Australia, the UK, Canada, the US etc by looking at the economy overall and discounting international inflation when setting interest rates.
Where can we look to leadership on this issue? Not National and not Labour. The Greens and New Zealand First have led the way in calling for reform of how we manage interest rates. It’s high time Labour joined them.