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The Bad Sting of Inflation | Otago Daily Times News Online

Reserve Bank Governor Adrian Orr wasn’t exaggerating inflation concerns when he said this week “we’re not in an ideal situation right now.”

The annual inflation rate soared to 6.9%, mocking the bank’s 1% to 3% target and presaging various adverse effects.

These are in progress before our eyes.

The cost of food, rent, tariffs and all other essentials are rising rapidly and the value of money is falling.

Mortgage rates are rising as savings erode.

Once integrated, inflation soars.

It makes sense to buy now if possible because tomorrow the purchase will probably be more expensive.

Big pay raises are needed to try and keep up, and that keeps the corkscrew twisting.

Somehow this spiral must be broken.

The traditional method is to raise interest rates to dampen demand. A household that pays $1,000 more per month on the mortgage has less to spend, less to stimulate the economy.

Dr. Orr last raised the official exchange rate by 0.5 percentage points, and his official indications are that further hikes are expected in the coming months.

He could cite high inflation in the US and Britain (8.5% and 7%), the now dreaded supply chain problems and the war in Ukraine. The effects of China’s battle to eliminate Covid are additional reasons for international inflation.

Finance Secretary Grant Robertson blames foreign influences, while National condemns government spending for “pouring oil on the fire”.

The rates of Australia, 3.5%, Singapore (2%) and Japan (1%) are used to argue that New Zealand could have followed a different path.

It’s likely that the truth lies somewhere in the middle.

New Zealand’s $55bn of ‘quantitative easing’ – money printing – was among the highest per person, and Dr Orr was likely too slow to rein in money supply and interest rates. interest.

Regardless of the “infrastructure deficit”, the government has been relatively free in its spending. The fires have been fanned and the additional $6 billion spending allowance due in next month’s budget will not help.

Nor is the drip, the drip, the extra costs for businesses.

The increase in public spending is never surprising. Governments face many pressures from so many worthy causes and programs, from so many demands.

Powerful state unions will also always advocate for their “bad” wages to be improved.

An even higher application of industrial muscle is expected from this quarter, with inflation of course being cited.

That’s not to say National’s response to tax cuts is going to help.

More money in hand will be needed to offset more costs, but more spending, whether by government or through individuals, has the same stimulating effect.

Cycles are the nature of market capitalism, the least bad system we have.

There are periods of growth and expansion, then crashes or “corrections” – maybe about every 10 years or so.

This leads to adjustments and changes. This creates many losers and, at the same time, new beginnings.

For a while, the world seemed to believe that it could create money with impunity.

The traditional rules of economics needed to be overhauled, we were told.

This turns out to be wrong. There was no free lunch.

Inflation is setting in and it will take sharp adjustments to bring it under control.

Inflation impoverishes the tenant, the mortgagee and the saver.

We may well be heading into a period of declining living standards.

Fortunately, our high employment rate is a partial cushion. The backlog of demand will help keep us going for a while, ameliorating some of the worst immediate impacts.

Ironically, it is a possible collapse in demand that could derail inflation and, in turn, halt rising interest rates.

Generations that have not experienced significant inflation are feeling the effects.

They will be surprised at how disruptive it can be.

Hopefully New Zealand can manage and then progress.

But, as Dr. Orr said, “we’re not in a good position right now.”