Inflation – Curing an Addiction

Gareth MorganEconomics

Gareth Morgan, Director of Gareth Morgan Investments

Many people have decried the infatuation some have with achieving low inflation. There is no denying that taming our delinquent inflation performance has been a bitter battle prompting calls for less stringent targets, such as inflation at the rate of our trading partners.

Let’s focus on our relative performance – against that of our trading partners. Japan currently has consumer price inflation of 3.3% (year to August); Germany has an annual rate of inflation of 3.9%; the US 3.8%; the UK 4.7% and Australia 3.4%. New Zealand’s rate in the year to September is likely to be around 2.5%. This is approximately 1% less than the weighted average of our trading partners and in the context of past relative inflation performance is an insignificant difference. Those arguing for an inflation target equal to the rate achieved by our trading partners are wasting their breath. Other countries have lowered their inflation rates too over the last year and are likely to move lower over the next 12 months. Over the last six months Australia has recorded negative inflation. Nominal wages actually fell in that economy over the quarter ended May 1991.

By sticking to our target of 0 to 2% inflation we may only achieve inflation comparable to our trading partners. There have been few serious suggestions that we should target a rate higher than our trading partners.

Getting inflation down has many significant costs and these are often the sole focus of those arguing for some relaxation of monetary policy. These appeals conveniently ignore the costs of high inflation, because the advocates for slacker monetary policy have much to gain from higher inflation. Property owners, for instance are basically high inflation addicts and going cold turkey is a particularly nasty experience. Let’s face it, most of us own property and have enjoyed a substantial inflation-driven increase in our wealth over the last 10 to 20 years.

Those without property, or who have been mug enough to save have been the losers in this process. As the Reserve Bank has pointed out it is the poor and unsophisticated who suffer in periods of high inflation. How tenable is it, therefore, for well intentioned mouthpieces of the poor and downtrodden to root for higher inflation.

An important aspect of lower inflation yet to be grasped by businesses is that it delivers an environment for making longer term commitments. With lower and more stable prices wage agreements could reasonably be secured for periods of up to three or five years, giving both employees and employers greater certainty. Being able to fix longer term contracts could be in fact more important from the point of view of competitiveness than simply lower inflation.

Mr Bolger’s audible thoughts at the CTU conference about balancing economic growth and low inflation have served to highlight the sensitivity of financial markets to any suggestion of violating the Reserve Bank Act. Markets can be forgiven for being touchy given the pounding the Government has given its credibility over the last week or so.

Inflation – Curing an Addiction was last modified: December 15th, 2015 by Gareth Morgan
About the Author

Gareth Morgan

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Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.