Inflation increases are largely driven by rising rents and construction costs. Video / NZ Herald
OPINION:
The Reserve Bank says it is "resolute in its commitment to ensure consumer price inflation returns to within the 1 to 3 per cent target range". Meanwhile, the commentators are in near-universal agreement that inflation has peaked.
It is wishful thinking. These are the same people who said inflationwould be transitory.
Oil prices have come down from their peak, but there has been no more production. International freight rates have been reducing, but there are still serious supply chain issues.
Russia and Ukraine have done a deal to release Ukraine's wheat. The next day the Russians attacked the port of Odessa.
Inflation in the US, the engine of the world economy, has hit 9.1 per cent. The Federal Reserve's increase in interest rates is driving up the US dollar and the kiwi is falling in value. Our imports are going to cost more.
Domestic inflation is roaring along. One transport company just increased their prices by 15 per cent.
Last week brought home to me my own inflationary expectations. The seamstress who had hemmed some jeans charged me her pre-Covid price. I was so surprised I asked her if she had undercharged me.
A Herald headline says that when it comes to pay rates, "$90k is the new $70k". Wage rises are embedding inflation.
Labour's panic response is making inflation worse. As this column predicted, Labour has found it impossible to remove the "temporary" subsidies on fuel and passenger transport.
The three-month "temporary" income support will put 80 per cent of adults on some form of income support. All the money is borrowed. It is inflationary. Ending the "temporary" income support on Christmas Eve will require more fortitude than Labour has ever displayed.
The Reserve Bank has turned on its head the central bank's role to be lender of last resort. The Reserve Bank's "Funding for Lending Programme" is providing cheap money to the banks. To date, $12.66 billion has been lent at the OCR rate of interest. This social credit for the trading banks is why your bank pays you so little on your savings.
The Reserve Bank is yet to withdraw the $53.5b it printed that caused domestic inflation.
With the Reserve Bank running a loose monetary policy and the Government running a deficit, why would prices have peaked?
Reserve Bank of New Zealand Governor Adrian Orr. Photo / Mark Mitchell
Claims that we can achieve low inflation with a soft landing are also wishful thinking. Nowhere, ever, has 7.3 per cent inflation returned to 1 to 3 per cent without a recession.
The Government will be taking inflation seriously when Grant Robertson says something like this: "Rising unemployment and the recession have been the price that we have had to pay to get inflation down. That price is well worth paying."
Or he says: "This is the recession we had to have."
The first is a quote from May 16, 1991, by Norman Lamont, the Chancellor of the Exchequer in John Major's Conservative Government. UK inflation had peaked at 8 per cent.
The second is from Paul Keating, then Labor's Treasurer, in November 1990 when Australia's inflation rate was 7.48 per cent.
We have forgotten how hard it is to get 7.3 per cent inflation under control.
When Lamont made his famous statement, the Bank of England's interest rates reached 13.875 per cent. When Keating made his statement, the Reserve Bank of Australia's official cash rate peaked at 17.5 per cent.
In New Zealand, in order to tame inflation bank mortgage interest rates reached 18 per cent.
There is zero chance that an OCR of 2.5 per cent or even the predicted 4 per cent next year can stop 7.3 per cent inflation.
We are already seeing claims that the cure for inflation is worse than the illness. Claims that we should prioritise employment over inflation. Over time there is no tradeoff between employment and inflation. All countries with chronic inflation, such as Argentina, also have chronic unemployment.
A group of New Zealand economists are about to publish a clever piece of research analysing polling around the world to show that we care six times more about unemployment than we do about inflation. This may be news to economists, but not to politicians. Labour is ignoring inflation and recklessly borrowing and spending to maintain employment. It cannot work. It is spend, borrow and bust.
We do not have a choice about the coming recession. Economist Ludwig von Mises famously warned: "There is no means of avoiding the final collapse of a boom brought about by credit expansion".
While inflation has never ended without a recession, not all recessions end inflation. Today's policies will result in both a recession and inflation - stagflation.
The reason why no sensible Reserve Bank allows inflation to get established is that the cure is so painful. We need leaders courageous enough to say we will only achieve sustained full employment when we take the tough actions needed to stop inflation.
Final thought: can you imagine National's finance spokesperson, Nicola Willis, ever making a statement like Norman Lamont's?
- Richard Prebble is a former leader of the Act Party and former member of the Labour Party.
