Inflation at June year high

Press, 15 July 1987, Page 1

Inflation at June year high

By

BRENDON BURNS,

political reporter

A damaging increase in inflation was delivered to the Government yesterday on its third anniversary of taking office.

Against most predictions, the consumers’ price index rose 3.3 per cent in'the three months to June 30, according to figures given by the Statistics Department. Financial markets immediately reeled, interest rates jumped, share prices fell, and there was a flurry on the futures market.

Most economic commentators had forecast a result similar to or below the March quarter result of 2.3 per cent.

The latest rise takes inflation for the June year to a record 18.9 per cent, although at least 5 per cent can be attributed to the introduction of goods and services tax. Sir Robert Muldoon’s National administration had held the inflation title with an 18.4 per cent year to March, 1980.

The new title-holders — the Minister of Finance, Mr Douglas, and one of his Associate Ministers, Mr Caygill — yesterday were putting brave faces on the C.P.I. result.

They attempted to explain that the March figure was about 1 per cent below what was expected and the June quarter was consequently higher.

The Ministers said two factors were mainly responsible for the June rise. GST had come through on such items as winter clothing and lagging interest rate and house price increases of some months ago had now caught up. Clothing costs accounted for 11.6 per cent of the 3.3 per cent rise and housing costs 25.4 per cent.

. Some element of the rise is a result of Government charges including increased Housing Corporation rentals and power prices.

Private transport made up 16.2 per cent of the quarterly movement

Messrs Douglas and Caygill dismissed suggestions that the result was devastating for the Government with the General Election only a month away. Mr Douglas said he staked his reputation on inflation having fallen to single figures by early next year, as commentators have been forecasting. He warned parties in the wage round that they would have to bear the costs of a high settlement. This was taken to refer to possible impact on inflation, profitability and jobs.

Mr Douglas said it appeared that manufacturers and the financial markets had lower inflation expectations than consumers. The Government’s policies would get inflation down, he maintained. Asked about the effectiveness of his monetary policies, given that inflation had risen, Mr Douglas said, “We have certainly got a hold on the situation.” If anything, he said, the bias was towards the policies being too tight and that approach might need to continue until inflationary expectations came down.

Mr Caygill said the June quarter was usually the highest for the year. He suggested also that the latest result was out of date, as much of the survey had been done in mid-May but car prices, for example, had begun to come down from June 1. National’s leader, Mr Bolger, was yesterday launching his party’s health and social welfare policies when news of the 3.3 per cent inflation figure was brought to him. He demanded confirmation before speaking about the result. Later, Mr Bolger said it was an appalling figure. “It is much, much worse than it ought to be. Economists were expecting a rise of maybe 2 per cent during the quarter — but this is staggering.”

Mr Bolger said the Government was to blame for the annual rate of 18.9 per cent because of its policies, which included jacking up public sector prices.,

People could "say goodbye” to any hope of interest rates coming down. “People’s mortgages and hirepurchase payments are going to go up and go up substantially.” The Opposition’s spokesman on finance, Mr George Gair, said the June result was a body blow to Mr Douglas. Five main obstacles remained to frustrate attainment of single-digit inflation: The coming wage round; a possible rise in GST as forceast by the Labour activist, Mr Simon Walker; new State corporation borrowing and resulting rises in their prices; the flow-on effect of these increases; and failure to control the money supply.

Financial details, page 39