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Inflation up but already on way down

Written By: - Date published: 1:18 pm, October 21st, 2008 - 21 comments
Categories: economy - Tags: ,

Inflation hit 5.1% for the year to September driven by the mammoth spike in oil, food, and other commodity which has abated since then, for now.

There is nothing that could be done to avoid this impact on New Zealand from international markets. The economy is already in recession, and now would be the worst time to apply the brakes to the domestic economy in a futile attempt to counter price rises coming from abroad. Not that this fact will do anything to dissuade opportunistic attacks from National and its proxies, who will rely on their audience’s ignorance to dishonestly lay the blame at Labour’s door.

Fortunately, the worst is already over. September quarter inflation was lower than June quarter and December quarter will be lower again, given the drop in fuel prices. In the medium-term, barring more shocks (which I personally expect but the officials don’t model for), inflation will fall back into the target 1-3% range. Right now, inflation isn’t the problem, growth is (although the causes of the two are inter-linked and largely outside domestic control). Given that, there is nothing to stop the Reverse Bank making a major reduction in interest rate on Thursday to give the economy a kick start.

21 comments on “Inflation up but already on way down ”

  1. bobo 1

    Inflation is the least of the countries worries I would say is just an overhang from high oil prices in July.

  2. Lampie 2

    There is nothing that could be done to avoid this impact on New Zealand from international markets. The economy is already in recession, and now would be the worst time to apply the brakes to the domestic economy in a futile attempt to counter price rises coming from abroad. Not that this fact will do anything to dissuade opportunistic attacks from National and its proxies, who will rely on their audience’s ignorance to dishonestly lay the blame at Labour’s door.

    Hmmm I smell the stench of merchant bankers to blame here, hmmmm maybe John Wayne-Key

  3. QoT 3

    Slight typo in the headline there, SP.

  4. Tane 4

    I’ll fix it for him. Sigh…

  5. Non-tradable inflation was 4.1% – this does not include anything to do with world prices.

    The fact is that there is an issue with inflation – which stems from the Bank letting core inflation rise too strongly several years ago. Given the special circumstances we are facing, the Reserve Bank is going to ignore inflation in the short-term to prevent a wholesale collapse in economic activity – however, once that is achieved they will have to peg-back inflationary pressures.

    Inflation is always a problem – the advantage of inflation targeting is that we can deal with this problem without having to sacrifice long-term growth and stability. The inflation failure is in the past – and we will have to pay in the future to fix it.

    With current policy inflation will not fall back into the target band “over the medium term” – even the Bank has resigned itself to this fact.

  6. Daveski 6

    No disagreements at all SP. Haven’t seen any attempts to politicise this as it was pretty much as you say.

    Government spending has been increasing as a % of GDP but neither Labour nor National appear to be worried about that at present given the circumstances. To that extent, I’d say Labour has dodged a smallish bullet but the main impacts were uncontrollable and as you point out will address some of the pressures as prices slip back.

  7. Sarah 7

    No one will try and politicise this – it simply doesn’t make any sort of logical sense to blame the government for a problem that is derived from international factors. Hell, even Farrar hasn’t tried to.

  8. Phil 8

    . In the medium-term, barring more shocks (which I personally expect but the officials don’t model for), inflation will fall back into the target 1-3% range.

    What officials would they be?

  9. “it simply doesn’t make any sort of logical sense to blame the government for a problem that is derived from international factors”

    Indeed, except for the fact that our inflation problem isn’t the result of international factors – the increase in petrol and food prices has made the consumer price index rise a bit more, but real, underlying inflation is higher than it should be. The Bank has the ability to control that and didn’t.

    It is actually quite easy to blame whatever government is in power for the inflation problem – you merely have to say that they consistently spent more than they implied, which leads to the RBNZ not increasing interest rates enough and, viola, you have an inflation problem. That is not an argument I’m going to make here though.

    [lprent: Link to it here when you do, that way I’ll see it. That is a discussion I’d like to get involved in. And I’m a bit busy to read around the blogs at present.]

  10. Pascal's bookie 10

    It is actually quite easy to blame whatever government is in power for the inflation problem – you merely have to say that they consistently spent more than they implied, which leads to the RBNZ not increasing interest rates enough and, viola, you have an inflation problem. That is not an argument I’m going to make here though.

    Now that’s some quality ambiguous.

  11. lprent 11

    It isn’t really – but I did have to double take a few times. What he is saying is that the government spent more than they’d indicated to the RBNZ.

    My issue with that would be – when?

    Inflation affects the cost of goods and services to the government as well. So if there was higher than expected inflation or wage increases then the government will have get budget problems as well. All businesses have that issue. Unlike businesses, very little of the government operations have the option to then increase prices to recover costs. It becomes a chicken and egg problem.

  12. Pascal's bookie 12

    But without saying why he is not going to make that argument here, we don’t know whether or not Matt accepts that the argument applies to NZ right now.

    It’s just an argument someone could make to blame a government. 😉

  13. Stack 13

    “no-one will try and politicise this – it simply does not make any sort of logical sense to blame the government . . . ”

    Of course some people are devoid of any sort of logical sense, e.g John Key, in his campaign opening speech on 12 Oct, blaming the government for the following:

    • You had nine years without a tax cut.
    • Interest rates doubled.
    • Inflation went through the roof.
    • The wage gap with Australia widened.
    • And more of your friends and family have left this country permanently.

    ( http://www.national.org.nz/Article.aspx?articleId=28713 )

  14. gomango 14

    To expand a little more on what Matt said (all of which is very coherent and correct) core inflation doesnt include the direct price impact of traded commodities (or housing for that matter). What can come thru is the second order impact of tradeable goods – ie petrol goes up, cost of inputs to a business go up and where they have pricing power, firm raises its prices. Or petrol prices go up, wage earner fills his holden and says “gee that was expensive. Must ask boss for a 6% pay rise instead of 3%.” Which leads to what the RBNZ really targets – not reported inflation but inflationary expections. Reported inflation is just a backward looking indicator of where inflationary expections of the various components of the economy kind of sort of panned out. I dont think monetary policy is a science, rather its an art, and for all his other blemishes Brash was actually rather good at running monetary policy under the framework politicians gave him. The major criticism of Bollard is that he was far too lax about raising rates when the economy was growing strongly on the back of high commodity prices. And now we are seeing the result of the easy liquidity (which flowed into inflated asset prices) we had for 5 years. We have to pay for the easy money by giving up some hard money (ie house prices, overpriced equities falling back to more normal valuations) and an adjustment shock always has a severe impact on those most exposed to over valued assets. There is no such thing as a new paradigm.

    Inflation is bad. Its guaranteed to make everyone poorer whereas other bad things (excesses of either left or right wing economic policy) tend to make just some people poorer. And the RBNZ act is the “least worse” solution to target inflation. I find it interesting though, essentially the RBNZ framework was set up in the late 80’s – little has changed in the levers the RBNZ has to adjust the economy (though their internal forecasting and analytic abilities have developed), compare that to the absolute avalanche of innovation in financial markets and its easy to see why inflation targetting seems a bit old fashioned. It wouldn’t work for political reasons, but I think the RBNZ needs independent, broad fiscal tools to complement monetary policy – perhaps a mandate to increase/decrease GST over a business cycle with any additional revenue at the top of the cycle going into a sovereign fund to be lent back to the government at the bottom of the cycle.

    And Stack, Key can legitimately pose those arguments – its very hard to prove or disprove them though. If one of the compents of GDP – say X (governement expenditure) is inefficient or poorly delivered it will have a negetive macro effect which could show up as inflation. Not making that case as I don’t know the answer but a good economist (depending on his political bias and intellectual integrity) could easily prove /disprove the supposition.

  15. Hoolian 15

    Matt Nolan is right on the ball.

    Non-tradable inflation has nothing to do with international markets. It’s like blaming Zimbabwe’s inflation on the international economy – which is incorrect, its Mugabe’s fault, and his government. The greatest contributor to inflation is consumer spending – i.e. the goverment of the last nine years has been spending excessively and not investing or saving enough of it (despite what Cullen thinks)

    Hence why the Reserve Bank spent most of 2004-2007 telling Cullen to stop spending surpluses. But he didn’t listen because Labour are morons at elementary economics.

    That’s why National and the rest of NZ are blaming Labour. Because its their fault. They are responsible for pushing up inflation through spending – which they were warned about. Take your whimpering elsewhere, Clinton. Your rigid ideology blankets any commonsense you might have

  16. Matthew Pilott 16

    What, Hoolian, on reducing debt, pumping up the Cullen fund and WfF, and polwing the dough into Kiwisaver? The government wasn’t buying too many wide-screen TVs and packets of crisps. Take your half-eyed (you don’t even get a whole eye) bluster elsewhere, Hoolian. blah blah blah what you said. So much anger – so little substance.

  17. Phil 17

    Inflation affects the cost of goods and services to the government as well

    Pedantic point: “Inflation” as we measure it in the CPI does not reflect the changing costs faced by government going about its business, only the changes in prices faced by consumers.

    Approrimate changes to the costs of government operation are better reflected in the Producers Price Inputs Index (industry M onwards) Labour Cost Index, and Capital Goods Index

    All available on the helpful Statistics NZ website
    here

  18. Hoolian 18

    What, Hoolian, on reducing debt, pumping up the Cullen fund and WfF, and polwing the dough into Kiwisaver? The government wasn’t buying too many wide-screen TVs and packets of crisps. Take your half-eyed (you don’t even get a whole eye) bluster elsewhere, Hoolian. blah blah blah what you said. So much anger – so little substance.

    Matthew Pilott, there is a considerable amount of irony to that statement. But I won’t retaliate. Why are you not prepared to debate the issues as opposed to run of with your mouth? Authors on this blog never defend their posts, its pathetic.

    In the massive surplus in Budget 2007, Labour did not spend enough of the $11 billion on debt reduction or KiwiSaver. In fact, not enough was spent on KiwiSaver as detailed in the PREFU. Labour increased public spending in all of its ministries (save for Maori Affairs), continued to roll out plans for spending, despite being warned by the Reserve Bank, and wasted away opportunities to dramatically increase New Zealand’s economic prosperity. Pilott, you are in no position to discredit the Reserve Bank just because you blog at the Standard.

    Labour did not purchase TVs, or crisps as you suggested. But it might as well have done. Its horrific levels of spending over the past nine years has shredded the economy, and done nothing for our economic prospects. So what if they reduced debt to 17 per cent of GDP – all that will have been undone by 2012, beyond that its expected to get much, much worse.

    Also, WFF is not anti-inflationary. Tax cuts would have been, but tax credits fuel inflationary pressures because it’s considered government expenditure as people are forced to apply to the government for it, as opposed to having it reimbursed in their incomes.

    No wonder National has taken to calling Cullen a fair-weather Finance Minister.

    So much anger, such little substance.

  19. Matthew Pilott 19

    Hoolian, if you could restrain yourself and post comments free of abuse you might get a response – perhaps you missed it over the years of your life but attacking people personally isn’t a good way to get into a discussion with them. I’ve yet to see you post a comment that doesn’t end with a personal attack, so I’d suggest curtailing them. Whether the rest of what you say merits a response is a different question.

    There was, as you put it, ‘considerable irony in that comment’ of yours. You can hardly call me angry for mocking your abrasive style. Perhaps you didn’t see that that was what I was doing. “Why are you not prepared to debate the issues as opposed to run off with your mouth? ” You can hardly say that and then follow up by debating the issues that I raised! I’m surprised the contradiction didn’t strike you.

    Anyway, all that aside, I disagree that government spending alone caused our inflation to go outside the RBNZ optimal range. Some of it did, sure. I guess that brings us to the classic “wage increases are inflationary” argument – but public sector wages did not rise over and above equivalent private sector wages. That’s an unaviodable expense.

    As I understand it, spending on Kiwisaver has far exceeded forecasts due to an exceptionally high uptake – this also counteracts inflation by tying up private expenditure. Not a bad way to fire off a few billion.

    Debt reduction has eaten up a fair few more billion over the years – that an unsavoury international situation is likely to reverse those gains isn’t Cullen’s fault, and it’s worth noting those gains would have not existed without Cullen. Instead of Key’s fabled ‘decade of deficits’, we’d be half way through our first one under Key/English. I wouldn’t call them ‘fair weather Finance Ministers’, given that their policies clear out any fair weather before we get to appreciate it!

  20. The Realist 20

    Notwithstanding whether inflation is going to go up or down (as there is still some price pressure to come) but rather what is the true level of inflation at different levels of society.

    I remember a few years ago a think tank did an analysis of inflation in the UK and found huge variances between differing groups, due the basket of goods they were purchasing.

    At that stage those over 60 odd had about 3 times the inflation rate of students, as much of their expenditure was on energy costs, housing and food (going up) while the young spent more on clothers, electronics, holidays (all going down).

    Probably another example of stats not really telling the true story…

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