Bad news on inflation

Press, 15 July 1987, Page 20

Bad news on inflation

The record inflation registered for the 12 months to the end of June — 18.9 per cent — is very embarrassing for the Government on the eve of the General Election. It might prove to be politically damaging. The consequences extend beyond the election, however, because inflation at this level is bad news for everyone, particularly when our trading partners are registering an average annual rate of about 2.3 per cent. For the last 20 years, the rate of inflation in New Zealand, as measured by the consumer price index, has been the most critical indicator of the state of the economy. For much of this period the rate has been woundingly high. It has caused much hardship and it has been central among all the country’s economic worries. Politicians differ in their approach to combating it, but all agree on its pernicious effects. The Minister of Finance, Mr Douglas, has argued consistently that control of inflation is his prime concern in managing the economy. In his commentary to the Budget he presented four weeks ago, Mr Douglas made much of his claim that New Zealand was “well into the process of securing an inflation rate comparable with that of our trading partners.” The latest figures give those words a hollow ring.

Mr Douglas, and his associate, Mr Caygill, have attempted some arithmetical gymnastics to lessen the damage to the Government from the latest figures. The 3.3 per cent inflation figure for the June quarter is too high, they say, because the figure for the March quarter, 2.3 per cent, in reality was too low. By averaging things differently, a 2.8 per cent figure for each quarter could be achieved. Perhaps so. But whichever way they carve it, the index shows that it is costing consumers an average of 18.9 per cent more today than it did 12 months ago to pay for the same things.

Mr Douglas and Mr Caygill also seek to blame the higher-than-expected figure on a delayed contribution from the goods and services tax. It is probably true that the inclusion of GST on some fees and services is only now coming to light. It is also true that the biggest single contribution from GST to inflation was felt in the December, 1986, quarter when the consumer price index rose by 8.9 per cent. GST was described too simply as a once-only boost to inflation; it sticks in the price system and compounds all other price increases — and will continue to do so.

The effect of GST should not be dismissed or discounted and it is fudging the

issue to attempt to set it aside from the inflation figures. People still have to pay it and it is an inflationary pressure that cannot be denied. The index cannot be manipulated in the way the Ministers suggest. It is an accepted measure of inflation that measures like with like impartially. It is not concerned whether a price rise is a one-off occurrence or a weekly event; or whether a price rise is the result of an extra tax or the result of a commodity shortage; if a price goes up, it is recorded.

It simply is impossible to discount large contributions to movements in the consumer price index and pretend that the index is still a reliable indicator of inflation. Ministers of Finance — and Governments going into an election — must live with the figures as they are, just like the rest of us, however disappointing or unpalatable the figures might be. High inflation continues to put New Zealand exporters at a disadvantage — though possibly by not as much as has the high value of the New Zealand dollar. The combination of the high exchange rate and the high inflation rate, if continued, will damage New Zealand exports, making New Zealand-manufactured goods less competitive abroad and squeezing price-takers such as farmers.

The Government has had some help in stopping inflation going even higher than it has. Declining prices for international commodities, especially oil, have helped to pull New Zealand’s inflation down. Oil prices are starting to creep up again, though, and with them come the inflationary pressures that can be imported into the New Zealand economy. The continued strength of the New Zealand dollar has reduced the cost of imports, but there are clear signs that the high valuation cannot be maintained. If the dollar starts to ease back, or if steps are taken to bring it back to provide relief for exporters, the task of sustaining a lower inflation figure might become even more difficult.

One of the most likely immediate effects of the announcement of a high inflation figure will be to postpone, for the time being at least, any further fall in interest rates. These might even firm, which would be a further boost for inflation.

The Government’s economic policies have caused no little pain. For the most part this has been accepted or endured in the expectation of an improvement in the economy. The latest inflation figures show no improvement and many voters are likely to ask themselves if the pain really is worth it.