Paul Catmur: Inflation? We don't know how lucky we are

A group of local women and shoppers hold up placards to protest about rising food prices and inflation related cost of living increases outside a supermarket in north London in February 1971. Photo / Getty Images

OPINION:

Being a teenager in the 70s in England left me scarred. Yes, it was the best ever decade for music, and we had a crazy hot summer in 1976, but apart from that everything else was a bit crap.

There was a recession, industrial strife, unemployment, power cuts and inflation up to 25 per cent, which makes New Zealand's current rate of 6.9 per cent look like we're not really trying.

On a personal level, my father lost his job, my mother set off on a bicycle to go to work and our house shrank in half.

This was very confusing to a teenager. I wanted to know why this was happening and what we could do to stop it. So I studied Economics at school and (initially) chose Business Economics as my course at University. I read economists from Adam Smith to Karl Marx, and no, that doesn't make me a communist, just inquisitive.

Towards the end of my first year, I asked my lecturer why with a number of economic theories to choose from we couldn't just pick one and fix the boom-bust cycle forever.

"Well," he said, "to be honest, none of them really seem to work."

Brilliant

So after several thousand years of trying mankind was incapable of controlling economic progress. We could manage heart transplants, nuclear fusion and flying to the moon but families were still tossed around like a paper bag in a typhoon every time the price of petrol went up.

Finding the whole thing rather futile, I gave up on economics and went to work in a casino.

Anyway, here are some thoughts on inflation for those who are similarly frustrated by the whole bloody thing.

Why do we have inflation now?

This bit is easy, it's because of the Covid-19 pandemic. Although we managed to keep most of us alive, the money handed out to workers and companies who were sheltering at home had to come from somewhere. Like most countries, we basically just printed it. Although useful in the short term, printing money has its downsides. If it was really that easy we'd do it all the time and just go to the pub.

Meanwhile, the production of all the nice things that we wanted to buy was slowed down because everybody was off sick. More money sloshing around with less stuff to spend it on = inflation. Chuck in the war in Ukraine and we have the trifecta.

Where are we on the world ranking of inflation?

New Zealand's current inflation is lower than most of the developed world, including the US and the UK, but a fair bit higher than Australia's. Whether people think that's good or bad seems to have more to do with political dogma than any great understanding of economics.

How bad can it get?

Framed on my wall is a One Million Mark note that my grandfather gave to me. It was printed in Berlin in 1923 when the inflation rate was around 2 billion per cent and people carried their money around in wheelbarrows.

German inflation and the concurrent economic collapse is believed to have been one of the main causes of the Nazis coming to power. Of course, we no longer require hyper-inflation to produce Nazis, as social media seems to manage quite nicely on its own.

Isn't there a quick fix?

There's a very simple cure for inflation, which is to rack up interest rates. The downsides are many, but as with the pandemic response we have a limited number of options from which we try to pick the least-worst one.

Couldn't we just go through government spending line by line cutting the ones we don't like?

We could, and we should, but it's like giving up coffee to buy a house.

How does New Zealand lead the world on inflation?

An impromptu remark from Roger Douglas in 1988 led to a 2 per cent inflation rate being adopted by the world's central bankers as a suitable target to aim for. It turns out that there is no real scientific basis for 2 per cent figure and Douglas had just made it up on the spot. Kiwinomics at its best.

When will it get better?

Hard to say as the global situation currently changes faster than a politician's mind. Let's just hope it doesn't get as bad as in the seventies in the UK. We just don't have the music to cope with it anymore.