Is Inflation Really Too High?

Tuesday, 23 July 2024, 2:19 pm
Opinion: Keith Rankin

These charts deserve a wider audience. (Refer my The Truth in New Zealand about Price Inflation and Interest Rates, Evening Report, 22 July 2024.) They show that CPI inflation has been well within the policy target range throughout 2024. And that PPI inflation – arguably a better technical measure of inflation than the CPI – was well within the policy target range in 2023. Indeed, the PPI [Outputs] for June 2023 was only 3% higher than it was in June 2022.

What New Zealand was experiencing earlier this decade was a spike in cost increases resulting from the Covid19 pandemic and from the Russia-Ukraine war. That's not inflation. It was just costs incurred which humanity had to absorb.

So, why did interest rates have to go up at all? They didn't in Japan, and Japan faced the same cost pressures as the rest of humanity.

What we saw in 2023 in New Zealand was lagged CPI inflation (compared to PPI inflation), and that was caused by (rather than cured by) high interest rates. Ask any business in the High Street what is the greatest cost-pressure they are facing, and they will say 'interest rates'. (We note that, from 2017 to 2019, when interest rates were very low, CPI inflation was significantly lower than PPI inflation; this was the benefit to the cost of living of having very low interest rates.)

Even CPI inflation has been within the policy target range (annual 1% to 3%) for some time. In the nine months to June 2024, the CPI only increased by 1.5%.

Our biggest failing has not been the poor decisions of the Reserve Bank. It has been the lack of questioning by the mainstream media. Which mainstream journalist or outlet has asked the question: "Why do we have to have interest rates upwards of 5.5% when CPI inflation in 2024 has been running at about 2% and annual PPI inflation in 2023 was about 2%?"

If asked, Reserve Bank Governor Adrian Orr would probably say that interest rates have to be this high in order to prop up the New Zealand dollar exchange rate. Fair enough. But we need to be having a public conversation about this.

The first chart referenced above suggests another reason why interest rates are so high. It shows that from 2000 to 2008 (under the watch of a Labour government), Reserve Bank interest rates were consistently three percentage points higher than CPI inflation. (This is called, by economists, 'real interest' rates of three percent.) This suggests that the 2000 to 2008 settings are what the elites of New Zealand came to regard as normal, and continue to regard as normal. Thus, the New Zealand ruling class really sees today's level of interest rates as what they would call 'normal'.

The problem is that, under that 2000-2008 norm, income was flowing from the poorest New Zealanders (especially wage workers, first-home buyers, and small businesses) to the richest New Zealanders. High interest rates acted as an anti- Robin Hood tax. The richest New Zealanders – the ten percenters – would like to recreate that 'happy-for-them' norm. The problem though, for them, is that this kind of norm – reproduced throughout the western capitalist norm – gave us the 2008 to 2009 Global Financial Crisis.

High interest rates are possibly the most potent of anti-worker policies. Margaret Thatcher understood that, in the 1980s. Yet, these policies have featured significantly under Labour governments as well as under pro-capital governments.

Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.

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Keith Rankin

Political Economist, Scoop Columnist

Keith Rankin taught economics at Unitec in Mt Albert since 1999. An economic historian by training, his research has included an analysis of labour supply in the Great Depression of the 1930s, and has included estimates of New Zealand's GNP going back to the 1850s.

Keith believes that many of the economic issues that beguile us cannot be understood by relying on the orthodox interpretations of our social science disciplines. Keith favours a critical approach that emphasises new perspectives rather than simply opposing those practices and policies that we don't like.

Keith retired in 2020 and lives with his family in Glen Eden, Auckland.

Contact Keith Rankin

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