Grant Robertson says surging inflation is beyond his control; the opposition says the government should be doing more. They’re both right, argues Justin Giovannetti.
The signs were everywhere across the economy before yesterday’s announcement. New Zealand’s inflation rate is now at a 30-year high of 6.9%, reflecting the soaring cost of everything from tomatoes to used cars.
Most of us don’t really know what to expect. The last time inflation was this high in New Zealand, East German border guards were starting to dismantle the Berlin Wall. There is now a growing political battle in Wellington to pin blame on someone, or something, for ending a gilded 30-year run of manageable inflation and predictable interest rates.
Finance minister Grant Robertson says this is being caused by global forces, outside of the Beehive’s control. The National opposition argues the government has a role to play. To some extent, economists say both are right. The argument also isn’t unique to New Zealand, from the US to France, ruling parties and oppositions are holding similar debates. The reason for the blame game is obvious. The political points to be won by convincing voters that the government is at fault, for high petrol prices and expensive groceries, are immense.
The international picture backs much of Robertson’s claim. People around the world are reading similar inflation stories and feeling similar pain. In the UK, inflation is at a nearly 30-year high. In the US, it’s a 40-year high. New Zealand’s 6.9% is close to the global average. Canada is slightly lower at 6.7%, while the UK is at 7%. The European economies are generally experiencing slightly higher inflation than in Britain, while the US is at 8.5%. Many of the countries New Zealand compares itself to are suffering together.
“This is absolutely a global phenomenon. Interest rates across the world are at record levels,” said Craig Renney, the economist for the Council of Trade Unions.
He undertook a recent analysis of any link between Covid spending and inflation. He found none. Even a country like Sweden, whose decision to tackle Covid without a public health response was seen as madness by many, now has an inflation rate of 6.1%. Government spending isn’t the culprit. It’s the soaring cost of food, petrol prices, building materials and the increase in council rates. There’s no significant part of the economy that isn’t seeing an increase in prices.
“It’s microchips, it’s electronics, goods made in China where they are subject to lockdowns, and a global conflict disrupting supply chains across Europe. Russia is a large producer of aluminium and nickel – which are used for batteries – as well as oil and gas. Ukraine is one of the world’s largest producers of sunflower oil. Russian and Ukraine are some of the world’s largest wheat producers,” said Renney.
Most economists had actually expected the inflation number to be worse for New Zealand, well over 7%. It’s likely the figure is better than expected because of the decision to temporarily reduce petrol taxes. Petrol prices increased by 8.7% over the past year according to Stats NZ, while diesel increased a whopping 16%. Drivers who use diesel are getting relief through a reduction in road user charges.
The fuel tax cut shows how the government has a role to play. With widening lockdowns in China and a worsening conflict in Europe, inflation will likely get worse this year. The impact of today’s closures and disruptions won’t be felt for many months. As Renney says, the Beehive can help cut the country’s reliance on petrol and diesel; it can help upgrade one of the world’s least efficient car fleets. It can help ween the country off increasingly expensive fossil fuels for electricity generation, while insulating more homes to cut power demand. That all helps lower inflation.
The global nature of inflation doesn’t meant the country’s leaders can shrug their shoulders. There’s one country that threatens to torpedo the government’s claim that it couldn’t have done things differently: Australia. Inflation across the Tasman is only running at 3.5%. Among our nearest neighbours in Asia, New Zealand’s inflation is one of the highest. South Korea, China and Vietnam are also significantly lower.
Eric Crampton, chief economist at the New Zealand Initiative, says our Reserve Bank has some explaining to do. The bank is responsible for the national economy and, according to Crampton, it owns some of the current situation. When the economy looked like it was going to crash into a deep depression in the first months of Covid-19, the Reserve Bank dusted off its playbook from the global financial crisis and pumped billions into the economy. Within months, it became clear that the economy wasn’t going to crash after all. “This was not the time you want to run the GFC playbook again,” said Crampton.
The bank kept interest rates low for most of the next two years, watching as the housing market soared and unemployment tumbled to a historic low. While that was great for homeowners and workers, it set the dominoes now tumbling in today’s inflation surge.
“It’s going to take a fair bit to get inflation under control. For a long time, New Zealand had one of the most credible inflation targeting regimes in the world. We pioneered it,” said Crampton. Now, he’s not so sure.
“There’s nothing the bank can do about the war in Ukraine or global fuel shocks. The bank should look through that. But because the bank under the current governor has cared about everything under the sun except inflation, it will take time to create credibility that it cares about inflation. The last annual report mentioned climate change more often than inflation.”
The Reserve Bank is now aggressively raising interest rates, but that alone won’t win this battle. Inflation has a way of keeping itself alive. Workers likely are asking their bosses for raises now or thinking about it. Once those raises become large enough, prices increase, fuelling a cycle for more wage increases. And there’s one question top of mind when a worker asks for a big wage increase: Will inflation be with us for a long time?
A magic 8 ball would likely tell you: Signs point to yes.