Public Enemy Number One: Inflation

New Zealand: we have a new public enemy and its name is inflation.

Inflation is a thief in your pocket. In 2022 no household will escape its grasp. Kiwi households are now in a world of pain in which your money will be worth increasingly less tomorrow than it is today.

Living costs are rising and wages can’t keep up. In fact right now living costs are running laps around wages. It’s not just fuel, it’s food, rent and rates too. If you feel like you’re slipping a bit further behind at the end of each pay cycle that’s because you probably are. It’s a cost of living crisis.

Economists predict typical household costs will rise $150 per week this year. That’s not because you’ll be buying more - sadly you’ll be paying more for less. Your purchasing power is dropping and that leads to declining living standards. So much for working hard to get ahead. Increasingly New Zealanders will be working harder just to stand still.

How did we get here?

It’s convenient for the Government to blame the war in Ukraine. But let’s not forget, even before Putin invaded, New Zealand inflation levels had already hit a 30 year high - topping out at 5.9% for the year ending December 2021. That’s a higher rate of inflation than Australia, the UK, Singapore and a host of other countries experienced over the same time period.

So the impact of the Ukraine tragedy is adding fuel to a fire that was already burning strong in the New Zealand economy.

You might remember Grant Robertson crowing about the strength of the economy during the election campaign.

New Zealand had gone to war on covid, using every pump-priming tool in the kit- borrowing big, dropping interest rates and spending-up large.

The sugar-hit kept the economy going at a difficult time. But the underlying fundamental productive capacity of the economy hasn’t kept up. Things overheated and inflation set in. Now the pump-priming punch-bowl is being packed away and the hangover has begun.

So what next? The Reserve Bank now has no choice, to combat skyrocketing inflation it must prescribe the medicine of higher interest rates. Meaning your mortgage gets more expensive, it’s costs more for businesses to borrow and growth gets harder. Tough times lie ahead.

Where is the Finance Minister now? He was happy to take responsibility for the performance of the economy while the sugar-hit was coursing through its veins. What’s the bet he’ll find someone else to blame now that the hangover has set in?