Editorial: Low inflation keeping NZ economy on the ground

Is low inflation one of the factors keeping the NZ economy from taking off? Photo / 123RF

Editorial

EDITORIAL:

Is low inflation the new normal for our economy?

Rising petrol prices and rents grabbed the headlines yesterday as inflation rose to an annual rate of 1.7 per cent for the June quarter.

But it was far from a big spike and while it is inside the Reserve Bank's target band of 1-3 per cent, it remains on the low side.

Economists expect to see it falling again as the economy slows.

In fact, petrol prices have already started falling again.

More troubling for the Reserve Bank is the expectation that business spending and GDP growth will continue to dwindle in the coming months.

There was certainly nothing in yesterday's Consumer Price Index data to undermine market expectations of at least one, possibly two, cuts to the official cash rate this year.

The continued absence of inflation pressure has been one of the mysteries of economics since the global financial crisis.

It was understandable when economies were in recession but as growth has returned to the Western world inflation hasn't.

In New Zealand the annual inflation rate has risen above the Reserve Bank's preferred mid-point of 2 per cent just once since 2011.

In 2015 we skated dangerously close to deflation as the rate briefly dipped to just 0.1 per cent.

Has something structurally changed in our economy to keep a lid on prices?

Certainly there is a case to made for the deflationary pressure of the internet.

Online shopping has made finding the lowest available price easy. Apps like Uber do it for us in real time.

The elephant in the room is house-price inflation. Photo / Doug Sherring

But for those who remember the bad old days of the 1970s and 1980s, high inflation remains a threat we never want to see in play again.

Reserve Bank Governor Adrian Orr has suggested that rather than a new normal, this might just be return to the old normal.

Perhaps, he suggested, we should view the stability of the current era as a return to a low-inflation economy that was more normal through the middle of the 20th century.

It seems worth pausing to recognise the benefits of the price stability that we've increasingly come to take for granted.

But it's not all good news.

The elephant in the room is house-price inflation. Not counted in the CPI, the property market has been an inflationary outlier for the past decade.

It is certainly been one of one of the big drivers of wealth inequality.

Housing-related sectors in the consumer price index - like rents and building products - have also tended to be among the highest rising.

Outside of New Zealand's well documented housing problems it looks like we are destined to live in a world of subdued prices for a while yet.

But of course it continues to make life hard for businesses which can't lift prices.

It flows through to wage inflation, which also remains subdued.

And it eats into both business and consumer confidence, slowing economic growth.

We need to be careful what we wish for, but a bit more inflation in the economy would probably be a good thing.