Editorial: Let’s vote with our eyes open on scale of inflation fight

Inflation is a cancer that discourages productive investment and gradually devalues the currency. Photo / 123RF

Opinion

Three days after the nation has voted on October 14 we will receive the latest measure of inflation.

Possibly the consumers price index (CPI) will have risen by less than the 6 per cent recorded for the year to June 30. Or it could remain near that level and even be higher given recent oil prices. If it is the latter it will come as a shock to whichever parties are in a position to form the next government.

National and Labour, and indeed all parties that figure in coalition calculations, are campaigning as though the task of tackling inflation can be left entirely to the Reserve Bank. Politicians of all stripes seem content to accept the Treasury forecast that the CPI will be back below 3 per cent by the end of next year and they are campaigning as though their task in the meantime is simply to relieve one of the symptoms of inflation, the “cost of living”.

To that end, Labour is proposing more “free” services and National has committed itself to tax cuts from July next year. Both parties run the risk of worsening or prolonging inflation if they keep those promises.

At the same time, both are also aiming to reduce the growth of government spending over the next few years. If the CPI for the year to September 30 is worrying, the spending cuts will need to take precedence whichever party has been elected.

It is better for voters to be aware of this before the election rather than be given the bad news three days later. Though most people will probably accept the need for a degree of austerity to help get inflation down, it makes for a grumpy, cynical climate of public opinion when they feel, quite justifiably, they could have been warned before they voted.

It is being said of this election campaign that people are tuning out because there is an air of unreality about it. The various issues being debated are not the ones that might be motivating many voters. Part of that may be a realisation that inflation is more than a “cost of living crisis”, and for many it is not even that.

New Zealand’s median weekly pay rate has risen by more than the CPI in each of the past two years. As the Herald’s Liam Dann wrote when he reported the 7.1 per cent rise for the year to June: “Inflation may not be adding to the cost of living for many Kiwis”.

A median is the point at which half the people are above and half the people are below it, but even if everybody’s income was keeping pace with price rises, inflation would still be a debilitating problem for the economy. Inflation is a cancer that discourages productive investment and gradually devalues the currency making it harder to sustain our living standard.

Central banks can contain inflation once it is down but to get it down they need governments to reduce their spending too. Let’s vote with our eyes open.