CPI inflation misleading - does not reflect demand

Media Release July 18th, 2000

CPI inflation misleading - does not reflect excess demand

The latest annual CPI inflation figure of two per cent is totally misleading. It does not mean we need further interest rate rise as the Bank may be targeting entirely the wrong economic yardstick, says the President of the Employers & Manufacturers Association, Barry Brill.

"The abject lack of investor and business confidence should be closely examined," said Mr Brill.

"It represents a very powerful signal that any further interest rate rises later this year may not help beat inflation, but they certainly will depress the economy.

"Business is disenchanted with the outlook for two main reasons: future cost increases coming from Government policy, and uncertain price rises coming from offshore, such as higher fuel and raw material costs. Neither of these can be directly suppressed by the Reserve Bank.

"However both causes of anxiety could result in the tradeables sector being punished by Reserve Bank action. This will happen if there is a robotic translation of higher CPI figures into higher interest rates.

"Ironically, neither Government induced costs nor imported inflation should be the objective of monetary policy. The inflation target should be designed to curb domestically generated price increases brought about by excessive consumer demand.

"Plainly this is not the scenario we have today. The danger is that the Reserve Bank will be targeting external and government generated inflation pressures it can only address by flattening domestic demand in the economy even further. It means the private sector productive sector is forced to take the hit.

"This is not very clever though beyond the scope of the Governor of the Reserve Bank's brief as it presently stands. The challenge it presents has everything to do with the monetary review taking place."

Further comments: Barry Brill tel 09 486 3392 (bus)

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