The kind of growth we have at the moment could be described as mediocre and grumpy, based largely on population growth.
Meanwhile, productivity growth remains weak and firms are more reluctant to invest.
Margins are under pressure which is denting profitability and firms invest less when they make less. We have lots of uncertainty over economic policy. People are spending less as house price growth wanes.
Under these circumstances, it's hard to see why inflation will rise.
A fast-growing economy normally lifts inflation as capacity constraints emerge. Our economy is not growing fast enough to lift inflation though capacity is stretched in some sectors.
Typically, pro-cyclical parts of the economy such as housing, credit, residential investment and consumer spending contribute to an uplift in inflation. It's fair to say that these sectors are not firing on all cylinders.
The housing market is coming off the boil, credit growth is contained and New Zealand's debt funnel is full. Add to this some deflation from technology and overall inflation is likely to remain tame.
At the same time, we have higher petrol prices, pressures in the rental market, local authority rates rising faster than general inflation, rising regulatory and compliance costs – especially in financial services, local and central government scrambling to raise cash through a raft of mooted taxes, growing insurance costs and enormous pressure to lift wages.
This issue of increased wages is particularly contentious in New Zealand, which is still regarded as a low-wage economy.
Business New Zealand says this perception is a myth, citing New Zealand's ranking in the Organisation for Economic Cooperation and Development (OECD).
New Zealand wages are "average" because a lot of former soviet bloc countries are now in the OECD and below New Zealand. Rather than comparing itself to these nations, New Zealand should instead be looking at the advanced group within the OECD spectrum.
Firms generally find it hard to pass on cost increases – like wages – when the economy is more subdued. And in the current economic climate, there are a number of factors that will determine whether business will push through the change.
The first consideration is the extent of the cost pressures – and in this case, it's sufficient to say they're big and broad.
The second is the policy prescription, which is inflationary. Fiscal policy is adding to inflationary pressure. Households and businesses are being hit with more costs. Some of it reflects the new and better economic model – such as providing healthy homes and facing the realities of climate change – but some of it is not.
The third is the intensity of wage demands. There is a sense of utu and catch-up and there will be pressure for non-wage labour costs to rise too. Rest assured businesses will try to recoup these higher costs but whether they actually can is a moot point. But there needs to be a broader discussion about how to lift productivity in the market.
The fourth fact is society's general attitude, which appears more accepting of paying a little more for social conscience reasons. No one grumbled when the morning cup of coffee increased to cover lifts in the minimum wage from 1 April.
Consumer's expectations for inflation have lifted from around 3.5 per cent to 4 per cent now. Such measures have an upside bias to actual inflation, but the move is noteworthy.
The fifth issue is frictions associated with changing New Zealand's growth model. It's a change that is needed but carries near-term costs.
The economy is going to see less growth via the wealth effect (the boost to spending from surging house and land prices), and little growth from the dairy and non-renewable sectors over the coming years.
More growth will need to come from other parts of the economy. The other parts will take time to step up.
Prospects for investment are being curtailed by access to credit, costs and lack of a sizeable domestic savings pool. Costs are rising faster than asset prices, which disincentivises investment.
Firms tend to hold off investing when uncertainty is high. Migration is slowing.
There is no sign of an improvement in productivity to offset.
Facing such changes, the economy just can't grow as fast and the "hurdle" to seeing inflation lift is lower.
The past few years has seen a somewhat goldilocks combination of solid (albeit migration fuelled) growth and low inflation, but the next few years will see more mediocre growth with the potential for a pothole and a modest acceleration in inflation.
And that's Grumpflation.
- Cameron Bagrie is Managing Director of Bagrie Economics.
