THE PRESS SATURDAY, OCTOBER 12, 1985. Slightly lower inflation

Press, 12 October 1985, Page 18

THE PRESS SATURDAY, OCTOBER 12, 1985. Slightly lower inflation

The increase of only 2.8 per cent in the level of consumer prices for the September quarter, as measured by the Consumers Price Index released this week, has brought about the first downward movement in the annual rate of inflation since March, last year. Welcome as it is, the reduction is not great — inflation is now running at 16.3 per cent for the last year instead of the 16.6 per cent recorded for the year between June, 1984, and June, 1985. On its own, the isolated reversal cannot be said to establish a trend. Nevertheless, the fact remains that during the last three months the increase in prices was the lowest since the Labour Government took office. If the lower quarterly rate can be held or, better still, reduced, the picture is obviously brighter. The Acting Minister of Finance, Mr Prebble, is entitled to take some satisfaction from all this. A turning point is significant. Even so, he cannot expect many people to take him seriously when he suggests that, at a 16 per cent annual rate, inflation has been brought under control. A significant contribution to the rate of inflation — and a factor which accounted for almost a third of the increase for the quarter — has come from interest charges on house mortgages and from charges for credit. These reflect the high rates of interest being sought, and being paid, for loan money. The market is showing no real signs of a reduction in interest charges, so little abatement of inflationary pressure from this source can be expected for some time yet unless lenders feel confident about the rate of inflation in the coming year or so. The Minister of Trade and Industry, Mr Caygill, has credited the strong New Zealand dollar with helping to keep inflation down. To the extent that New Zealand depends on a wide, range of imported goods, and a high dollar

reduces the cost of these imports, the’ strength of the dollar has been a help. The higher exchange value of the dollar also means a lower return from exports and this too, in its way, helps to restrain inflation by reducing the amount of money in circulation. A corollary of this, of course, is that borrowers chasing a restricted pool of money help to keep interest rates high. High interest rates are also attracting overseas investors, with the result that the New Zealand dollar remains strong; and so the circle closes. The Government would be unwise to rely on the strength of the dollar as a weapon against inflation, however, for the question being asked in the financial world is not whether the dollar will ease, but when. Another obstacle to the control of inflation is the present wage round. If the figures released by the Statistics Department this week have any influence on the wage round, it will be the 16.3 per cent figure for the annual rate of inflation that will play the dominant role, not the slowing in the quarterly rate of inflation. The Federation of Labour president, Mr Jim Knox, has made this plain. The latest figures will tend to reinforce high claims, not reduce them so long as employees want to catch up on lost purchasing power. The figures that the department will present for the first quarter of next year will show some flow-on in prices from the present wage round. If wage rises are. higher than the Government hopes for, the inflationary impact of this wage round on the March, 1986, Consumers Price Index will make a nonsense of assurances that inflation has been brought under control. The speed at which prices are going up has — for the moment — slowed; it is far too early to claim a victory over inflation or predict an annual inflation rate in single figures by next year. Still, such a turn-around is a worth-while goal and must be sought.