All political parties are offering solutions to the electorate.
The question is; what levers could a government of any stripe reasonably pull to move the dial quickly? – without creating adverse consequences such as increased borrowings (which is one of the reasons we are here now).
Reducing the Government fiscal deficit and hence inflation, seems to be the current Government’s main tool.
Increasing taxes to provide subsidies would presumably have some inflationary effects and subsidies put in place are very hard to remove. There is some room to increase taxes though, which would need to be put into debt reduction or increasing productivity.
Increasing taxes has the potential to reduce private investment and with it, productivity.
Solar power will have an effect, but the lead time will be long. Breaking up gentailers could have the perverse consequence of reduction in investment in electricity generation when we need every electron we can get.
Limiting council rate increases creates the appearance of doing something but is fundamentally flawed. The “keeping the rates down mantra” is the reason infrastructure in many councils is in a poor state.
It seems we might be in for a long slog.
Clyde W
A: Wow, great question, thanks, Clyde. I have to say you’ve gone a long way to answering it yourself.
There are a lot of ways to deal with inflation, but few, if any, quick fixes.
Be wary of any politicians claiming they’ll deal with the cost of living with some kind of silver bullet policy.
Increasing the monetary supply is always inflationary (to paraphrase Milton Friedman). Decreasing it is disinflationary.
So in simple terms, there is no easy way for the Government to spend money subsidising the cost of living without copping an inflationary response.
If, for example, the Government decided to make public transport free and subsidise petrol prices, it would put dollars back into people’s pockets.
That would be a good thing on the face of it. But unless the Government has cut spending from somewhere else, then it would be borrowing to fund the subsidies.
That means more money circulating in the economy. It would deliver a short-term boost to growth but ultimately be inflationary.
This is a dangerous trap for economies.
As we saw during the Covid years, when the stimulus started to exceed the pandemic’s impact on demand, inflation soared. We also saw a spike in house price inflation (which is not captured in the Consumers Price Index directly).
Governments of different political stripes might look to redistribute their spending to help those who are in greater need of a break on the cost of living.
As long as it is fiscally neutral, it shouldn’t affect the inflation rate too much.
The one caveat would be the extent to which a policy encourages savings versus encouraging spending.
Money saved is removed from circulation, so more saving has a disinflationary effect.
That’s one of the ways that monetary policy works. When interest rates move higher, people are more inclined to save money and less inclined to borrow and spend.
This is all economics 101 really.
I understand that “fiscal discipline” is a boring answer. I see Finance Minister Nicola Willis was leaning on it yesterday as the annual inflation rate topped 4.1%.
Whether it plays well with voters remains to be seen.
What else can governments realistically do?
The only way to get away from money supply solutions for inflation is to look at structural reforms that might drive greater efficiency and take costs out of the economy.
There are some areas on the supply side that a government could focus on, although most parties will tell you they already do.
Increased competition in key markets, like groceries, electricity and fuel would help.
It makes it harder for businesses to pass on costs, and they generally have to live with tighter margins when there is more competition.
Trade reform and the reduction of tariff barriers are another way to lower the cost of stuff.
Again it’s about making markets more efficient to deliver goods at the lowest possible cost with maximum competition.
New Zealand governments have a good track record on this one.
There’s a bipartisan approach (from Labour and National) to doing trade deals.
But we are up against it in the current geopolitical climate. US President Donald Trump’s tariff policy is a pain and it’s costing us all money.
Given that council rates and electricity prices have been two of the biggest domestic offenders in inflation stats for the past year, there might be some scope for policy reforms there.
Will the cost of living always be a crisis now?
Kiwis are feeling bruised and battered on the cost of living after five years of elevated inflation.
In some respects, the economic downturn is still expected to come to our rescue.
Yesterday’s data showed non-tradeable inflation (the domestic stuff) dropped again to 3.4%.
That is half the rate (6.8%) we were dealing with at the inflation peak in March 2023.
Keen optimists will have noted that rental prices rose by the lowest rate in two decades (0.5% annually and 0.1% for the quarter).
Food price inflation was subdued. Some things like milk, cheese, and eggs were down by 9%, Stats NZ said.
Kiwibank economists, who have argued most stridently that the RBNZ should look through the current inflation spike and leave interest rates on hold, said the result wasn’t as bad as the topline number suggested.
“From our perspective, core measures of inflation are what matter,” they wrote in their analysis.
“The numbers look less scary when volatile energy (especially fuel) prices are stripped out.”
“This release should allow the Reserve Bank to breathe easy, even though their forecast of 3.9% was off by 0.2 percentage points.”
Kiwibank hopes the June quarter will mark the peak in annual inflation following the oil price shock.
It acknowledges that oil prices are heading up again as Middle East tension escalates.
“The RBNZ will therefore still be worried about the potential spillover effects of imported fuel prices into domestic prices,” they wrote.
But the June data provided some hope that businesses had not been passing on cost pressures to consumers immediately.
“The disinflationary forces, including a weak consumer, soft labour market and housing market help us paint a picture when we look to the future.”
“We’re expecting inflation to make a swift move back to 2% by the middle of next year. And monetary policy should be looking over this same time period. Because there is lots of spare capacity out there.”
However, as has increasingly been the case in the past few months, BNZ economists have a considerably less sanguine outlook.
“Inflation is a problem in New Zealand. Today’s Consumers Price Index is a strong confirmation of this,” wrote BNZ head of research Stephen Toplis.
Toplis notes that oil prices drove most of the headline number.
“But the worrying aspect of today’s data is not the impact of fuel but the depth and breadth of price increases across the economy,” he says.
He argues core inflation is still too high and will require the RBNZ to keep hiking rates.
Perhaps comfortingly, BNZ also sees the June quarter as the peak for inflation in this cycle.
But Toplis warns that this is predicated on the RBNZ removing stimulus.
“Success will be very short-lived if the RBNZ fails to move interest rates back to at least neutral, and probably higher, over the remainder of this year and into next,” Toplis says.
One way or another, it seems that inflation should be heading down in the coming months.
The only question is how painful the transition is for the economy.
Despite all evidence to the contrary (at the time of writing), I’m still hopeful that the US and Iran will see sense and start talking again before petrol prices rise to levels we saw in May.
Whether lower inflation – just means prices rising more slowly – actually resolves the cost-of-living crisis in this country is another issue.
I’m increasingly convinced that is a structural productivity issue that will only be fully solved by real wealth creation and real wage growth.
That will require some more ambitious structural reform than we have seen from our political parties to date.
On that topic, there’s a new book out this week that offers some advice to our political leaders.
Uncomfortable economics
Uncomfortable Economics takes a deep dive into New Zealand’s economy, its problems and how we might improve its performance.
Author David Schnauer is a retired lawyer with a passion for the topic.
Speaking from personal experience, it’s no small feat to get a book written and published in this country – especially on a complex topic like economics.
Schnauer does a great job of summing up some of the big structural economic problems that have developed in New Zealand’s economy over the past decades.
As the book’s subtitle (Hard policy decisions New Zealand’s politicians can no longer avoid) suggests, he also advocates some major structural reforms to get the economy back on a path to productivity and wealth creation.
Economist and author David Schnauer.
In Schnauer’s words, Uncomfortable Economics explores two connected challenges.
The first is societal. He argues Kiwis need to develop a heightened focus on building a successful economy. They need to care as much about New Zealand building a winning economy as they care about the All Blacks winning on the sports field.
The second challenge is political. We need to be brave enough to adopt the policy settings required to support long-term growth.
In particular, he targets unaffordable superannuation and healthcare; inadequate institutional saving; overpriced houses; banking and tax policies; and chronic government deficits.
He would, among other things, like to see the adoption of compulsory KiwiSaver and an increase in the rate of contribution – something regular readers will know I’m in favour of.
Schnauer takes an in-depth look at the New Zealand economy but not an academic one.
Aimed at general readers, the language is down-to-earth and the bigger concepts well explained.
Uncomfortable Economics is available from Amazon for US$9.99.
Don’t forget to check out the Herald’s new podcast, The Economy of Everything, with Liam Dann and Tamsyn Parker – thanks to CMC Markets.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts.
He joined the Herald in 2003. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”.
For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to [email protected] or leave a message in the comments section.
