John Roughan: There’s more to inflation than wages

OPINION

Can we please bury this phrase, “cost-of-living crisis”? It’s misleading and doing us harm. It was made up by politicians who think most of us do not understand what inflation really is.

When I was at school we were taught inflation was: “Too much money chasing too few goods.” That wasn’t hard to understand. Something had happened to throw production and consumption out of balance.

“Too much money” meant too much being spent. Money saved is not a problem. In fact, it is a solution - that’s how interest rates work. “Too few goods” meant the supply of goods and services could not keep up with the demand fuelled by the money available to consumers. So prices rise.

But it takes a brave politician to tell the public too much money is in circulation, particularly if you are in a government that is spending unnecessarily. Politically, it is safer to tell people they are victims of greedy oil companies, supermarkets and banks.

Make a beeline for the Beehive

Get weekly politics headlines with commentary from our political experts straight to your inbox.

Please email me competitions, offers and other updates. You can stop these at any time.

Email address

Sign Up

By signing up for this newsletter, you agree to NZME’s Terms of Use and Privacy Policy.

The trouble with treating inflation as simply a cost-of-living problem is that it allows politicians to offer simple answers that do more harm than good, like this week’s threat of petrol price controls and, the simplest panacea of all, giving people more money.

National started the nonsense, coining the “cost of living crisis”, which it would relieve with tax cuts. Labour rejected the phrase for a while, hoping inflation was just a passing consequence of global lockdowns. But once the disease set in, Labour adopted the misdiagnosis so it could offer more of the panacea.

The big announcement at the party’s annual conference last weekend was an increase in preschool subsidies to give families more to spend on other things. At her Monday press conference, Jacinda Ardern said the Government would “keep looking for ways to support New Zealanders as we can”.

The best support her Government could give all New Zealanders right now would be to stop adding unnecessarily to the amount of money in circulation. But now she wants banks to add to it.

She chided them on Monday for booking record profits and told them, rather chillingly, to consider their “social licence”. She thought they should be spending that money, for green projects preferably.

Banks are the inevitable repository of much of the excess cash governments injected into their economies during the Covid-19 panic and the property splurge that resulted. The more of that money that is salted away right now rather than put back into circulation, the better.

Prime Minister Jacinda Ardern and Finance Minister Grant Robertson. Photo / Mark Mitchell

At least the Prime Minister didn’t adopt the Green’s “windfall tax” on profits from rising prices. That wouldn’t be a bad idea if the tax was to be banked by the Government and paid off some of its pandemic debt. But the Greens want it given out to “help people make ends meet”.

Doubtless, there is a cost of living crisis for some households, but we don’t know how many. It suits politicians – and the media, it must be admitted – to imply everyone is feeling the pinch. Television news is constantly telling us, “Kiwis are hurting” and “families are hit by rising prices”.

Let’s do a quick reality check. Prices are not the only thing rising, wages have been rising too, at record levels. Median weekly earnings from wages and salaries rose 8.8 per cent in the year to June. Prices rose 7.3 per cent over the same period.

Benefit increases have also exceeded price rises. Stats NZ reported median weekly incomes from all government transfers rose 8.5 per cent in the June quarter. That includes NZ Superannuation, student allowances and payments from Inland Revenue and Work and Income.

The picture was similar in the latest quarter. “Average ordinary time hourly earnings rose 7.4 per cent in the year to September while the consumer prices index rose 7.2 per cent.

Read More

• John Roughan: Right-leaning winners in local elections ...
• Russia-Ukraine War: John Roughan - stop spouting idealism ...
• John Roughan: Govt needs to take lead in fighting inflation, ...

Grant Robertson was chuffed when the June figures came out. “Workers have experienced their biggest pay hike on record, outstripping inflation,” he said. “This is an extremely positive result and shows our economic plan is working. Unemployment is near record lows and wages are rising above inflation to help deal with the cost of living pressures.”

If our Finance Minister thinks wages can beat inflation, he didn’t see the 1970s. If his plan is to help keep wages rising faster than prices, we are in big trouble.

That plan has involved restricting immigration to force employers to hire from a smaller pool of local labour. Having put “too much money” into the economy, he has contributed to “not enough goods” being produced.

This is not a cost of living crisis, it is full-blown inflation, and treating only a symptom of it is making it worse.