A recent report in the Herald suggests inflationary pressures are beginning to appear with a small increase in the Consumer Price Index for the March quarter and more upward pressure on prices expected. Another report suggests such inflationary pressures are being caused by the rise in minimum wages on April 1.
Could higher minimum wages eventually lead to higher prices? Yes, but it is too early for that to happen and this should not impact price rises in the March quarter. There are other likely suspects such as supply chain disruptions and increased freight costs.
But it is important to acknowledge these price increases are an inevitable outcome of recent government policies.
A lot of this has to do with our response to Covid-19. Our Government failed to understand it was possible to be too restrictive where the economic costs become prohibitive. Government has consistently chosen to err on the side of being excessively restrictive.
In the past, governments were fighting recessions caused by shocks that had already happened. But with Covid-19 governments were fighting a recession they were exacerbating, if not causing.
Faced with the economic fallout the Government initiated massive deficit spending. Net core Crown debt is expected to reach more than 50 per cent of gross domestic product over the next five years.
We have been also running a policy of quantitative easing whereby the Reserve Bank buys up the government bonds used to issue this debt. This injects liquidity into the system. Think of this as cash floating around. The aim here is to keep interest rates low and, if and when needed, provide capital to businesses.
But without business expansion and increasing output, this extra money sets off inflationary pressures.
Sebastian Edwards, an international economist at UCLA, points out historical precedents: "Chile under President Salvador Allende's socialist regime from 1970 to 1973; Peru during President Alan García's first administration (1985-1990); Argentina under Presidents Néstor Kirchner and Cristina Fernández de Kirchner from 2003 to 2015; and Venezuela since 1999 under Presidents Hugo Chávez and Nicolás Maduro.
In all four cases, a similar pattern emerged. After the authorities created money to finance very large fiscal deficits, an economic boom immediately followed. Wages increased (helped by substantial minimum-wage hikes) and unemployment declined. Soon bottlenecks appeared and prices skyrocketed, in some cases at hyperinflationary rates. Inflation reached 500 per cent in Chile in 1973, some 7000 per cent in Peru in 1990, and is expected to be almost 10 million per cent in Venezuela this year. In Argentina inflation averaged 40 per cent in 2015."
As the Reserve Bank is tasked with maintaining inflation at low rates we will have to wait and see how they respond but in any event there will likely be significant economic pain as the Reserve Bank tries to rein in inflation.
Such expansionary monetary policies, besides generating inflationary pressures, will also exacerbate our wealth inequality.
For most households, their major source of wealth is the house they own. In previous recessions such as the Global Financial Crisis, house prices had taken a beating, making investments in real estate a losing proposition. But not this time around.
The lockdowns disproportionately affected blue-collar workers often working for hourly wages. White-collar workers who could work from home were not particularly affected or, at least, not to the same extent. By and large, they did not suffer adverse shocks to their wealth. Households whose income and/or revenue streams were unimpacted were free to invest in financial assets.
Our quantitative easing policies have fuelled huge speculative bubbles in financial assets such as houses and stocks.
NZ data suggests residential property owners are among the largest beneficiaries of government-related support provided during this pandemic. Mortgage holders will receive around $2.3 billion of relief on their repayments over 2020, thanks to the low interest rates.
But these benefits can only accrue to those who already own property and/or other assets or have the financial means to invest further. Low interest rates have been a massive boon to the asset-owning class, to the detriment of those with little collateral.
• Ananish Chaudhuri is Professor of Experimental Economics at the University of Auckland