NZ a small cork on a vast global ocean
OPINION: Inevitably, the government of the day tends to be held responsible for almost every conceivable social outcome, good or bad.
Last week’s 7.3% annual inflation rate, for instance, was treated as an avoidable calamity, even though it was significantly lower than the 9.1% inflation rate in the United States and the 9.4% rate in the United Kingdom, not to mention the 8.6% average across the European Union.
True, being told the cost of living is rising faster elsewhere is a bit like being told in childhood to eat one’s vegetables because people are going hungry elsewhere. (It doesn’t really help.)
So far, our tight labour market hasn’t translated into sharply rising wages. Thankfully, then, we’re not seeing a repeat of the dreaded wage/price spiral of the early 1980s. Still, while sluggish wage growth may help the economy, it isn’t such good news for the people trying to make ends meet.
To make sense of what’s driving up the cost of living, most of us rely on the commentary from bank economists and politicians, all of whom have an axe to grind. To Opposition figures, the spike in inflation has been partly caused by that familiar bogey, excessive government spending.
The Opposition, however, has been remarkably reluctant to specify which parts of the Covid recovery package were a mistake and what public services they would scrap to reduce government spending. In addition, the calls to cut government red tape have been particularly irrelevant, given how the Wall Street Journal continues to crown New Zealand as the easiest place in the world to do business.
As last week’s Reserve Bank figures indicated, the main causes of inflation are imported, not homegrown. Moreover, the inflation spike is being driven more by the cost of essentials than by discretionary government spending.
Petrol prices, for instance, rose by 32.5% over the past year. Supermarket prices rose by 7.1% and rents by 4.3%, a record rate of increase.
As Council of Trade Unions economist Craig Renney has argued, if you subtract essential items like food, household energy, and vehicle fuels from the picture, annual inflation was just 6.1%. If the cost of new building and all housing costs are also removed from the equation, the domestic drivers of inflation rose by only 4.1%. So what are the big ticket items? Well, costs accruing from international inflation rose by a whopping 8.7%. By comparison, domestic inflation reportedly rose by only 6.3%.
‘‘Inflation is still largely being driven from overseas and is not being driven by domestic factors here,’’ Renney concluded.
Regardless, the process of political point scoring continues to link the inflation rate to matters like the spending by government bureaucrats on their office refits. More to the point: if the main drivers of inflation truly are (a) international fuel prices and supply chain blockages, and (b) domestic spending on essential goods and services, then how can such pressures be eased by the Reserve Bank hiking up the cost of mortgages?
Many people will simply become poorer until – if the forecasters finally get it right – the international trends cause inflation to subside by late 2023. Ultimately, New Zealand’s economy is only a small cork on a vast global ocean.