Nairu is not a nice place. It took me a while to learn that it was an economic idea, rather than an island in the South Pacific.
The Non-Accelerating Inflation Rate of Unemployment is the rate below which inflation starts to rise. It suggests that governments should stop trying to push down unemployment once it gets to a certain threshold. It seems uncharitable, but it is useful because it indicates a speed limit for the economy, beyond which any attempt to accelerate growth will simply spin into inflation.
On Thursday the Reserve Bank revealed some sobering truths. It said our potential growth rate had halved from 3 per cent in the 2000s to 1.5 per cent this year. Attempts to grow faster than at 1.5 per cent will fire up inflation.
In recent years, households and businesses have been reluctant to invest. New houses haven't been built, new machines have not been bought, and workers have not been trained with the right skills. Households have focused on repaying debt, and businesses have also been reluctant to invest in a sputtering economy.
The result is painful. The Reserve Bank says that within a year New Zealand will hit the buffers of its ability to grow without generating inflation. It points to signs of skills shortages and wage increases in line with a time when our unemployment rate was about 4 per cent. The difficulty of finding labour is at levels last seen in 2006, when the rate was 4 per cent. Now the rate is 6.7 per cent.
