“Pay rises are finally running above inflation,” Kiwibank economists said last month.
“The cost-of-living crisis is coming to an end, slowly. It may not feel like it, yet, but inflation has eased and will ease further.”
“The [Reserve Bank] can declare victory in the war on inflation. And they have acknowledged the success, with rate cuts.”
New Zealand, though, faces jumping out of the frying pan and into the unemployment fire.
The seasonally adjusted unemployment rate, as measured by the Household Labour Force Survey, was 4.8% in the September quarter, compared with 4.6% in the previous quarter.
Although the figure was better than market predictions, Westpac chief economist Michael Gordon said the smaller-than-expected rise was due to more young people exiting the labour force. That’s hardly a reason to celebrate.
Treasury is picking unemployment to peak at 5.2% in 2025 (albeit at levels below those seen during the Global Financial Crisis, when the jobless rate hit 6.8%).
Those same Treasury forecasts predict inflation to sit at 2.2% next year. So, good news on the inflation front, and bad news on unemployment.
There is, of course, a well-established link between unemployment and inflation, thanks to the New Zealand economist Bill Phillips. According to the eponymous Phillips curve, higher inflation should bring about lower unemployment, and in turn, lower unemployment tends to push up inflation.
Both measures are also part of the Misery Index – a 20th-century yardstick that sought to gauge United States economic sentiment (out of interest, the index was better during Joe Biden’s administration than in Donald Trump’s first term).
Our shift from inflationary aches to employment agony may be welcomed by Kiwis who are secure in their jobs.
However, a 2022 study by University of Auckland business school researchers found that higher unemployment caused more despondency than higher inflation.
“We do know that when unemployment goes up, people are particularly badly affected in terms of reporting ... negative emotions,” Auckland University Economics Professor Robert MacCulloch said at the time.
The Reserve Bank, after a coalition deal between National and Act, is no longer required to consider the employment rate when setting monetary policy.
But our worsening employment situation should remain front of mind for Orr when he and his colleagues meet to decide on further possible rate cuts in a fortnight.
He may have declared victory on inflation, but at what cost?
