We are beginning to realise – or remember, if we are old enough – how hard it is to stop inflation. For a while it seemed to be a passing problem of post-pandemic demand, disrupted supply lines, shortages of labour and oil, aggravated by war in Ukraine.
But oilprices have eased, supply lines have improved and inflation has hardly relented. The latest quarterly figures showed it has spread beyond imports to the service sectors. I’ve encountered shocking increases in insurance valuations lately, reflecting building costs, and a routine medical check this week cost me $70.
I doubt many of these increases are needed to recover higher costs, they probably reflect “inflationary expectations” or, more accurately, inflationary opportunism – a provider wants to put up its prices and inflation is the perfect excuse.
Inflation is economic cancer. It is a growth in nominal values that displaces healthy growth in productivity and profitability. Like any cancer, unless it is quickly suppressed it will soon spread beyond the sector initially diseased into other organs of the economy, especially its brain.
It’s been 30 years since we last had inflation like this, 30 years since we discovered how to stop it and we’re often told we know how to do that now. Central banks can treat it with higher interest rates. Even the ageing opponents of “monetarism” in the 1980s are content now to leave the job to monetary managers – so long as they don’t cause a recession.
Recession has been a much greater worry than inflation over the past 30 years and each time something has happened that could cause one – a precipitous fall in stock markets, currencies, hedge funds or banking security, interest rates have been lowered to stimulate economic activity.
Consequently, over those 30 years, interest rates have steadily declined. They had become so low by 2008 that central banks had hardly any room to lower them further when the global financial crisis occurred. So they invented “quantitative easing” - printing more money, in effect.
That would have been inflationary but for the fact that, as a stimulant, it didn’t work very well. Growth was sluggish and economies became dependent on it. The US suffered withdrawal when its Federal Reserve board began to “taper” it down, and Europe never really got off the drug.
When Covid-19 arrived, causing worldwide pandemonium in 2020, interest rates were still low and central banks resorted to money creation again. But in this crisis, unlike the financial one, governments also panicked, fearing a repeat of the Great Depression.
Budget deficits and public debt ballooned as never before, making today’s inflation inevitable.
US President Joe Biden. Photo / AP
Nowhere were the fiscal stimulants greater than in the United States, where Donald Trump sent a cheque to everybody in 2020 and Joe Biden, when he took office in 2021, delivered a bigger one, though by then it was evident economies were recovering faster from lockdowns than expected and it was time to worry about inflation.
The US Federal Reserve began to increase its interest rate slowly and steadily, raising it more rapidly, in larger jumps, over the past few weeks. Just about all central banks, including ours, are doing the same. But so far without much help from their governments. Few are fighting inflation with fiscal restraint.
In New Zealand we seem to have forgotten how we defeated inflation 30 years ago. It wasn’t with interest rates alone. The “mother of all budgets”, the one Grant Robertson claimed to have reversed just before the pandemic, was a circuit-breaker.
The following year, 1992, was tough, deepening the recession we had been since 1989. But inflation finally dropped to the long-targeted 2 per cent in 1992 and the following year growth returned. Real growth, not the cancer.
Robertson came out of his recent meeting with the Federal Reserve Board chairman Jerome Powell in New York talking tough about next year’s budget. But on a typical day our news still consists of a pay increase somewhere in the public service, a case for more spending somewhere, a grant for some purpose of dubious urgency or even need.
The Government seems to think its job is to provide “cost of living” support while the Reserve Bank deals with inflation. National is no better, talking tax cuts without specific budget savings, the Liz Truss solution.
Most of us, let’s face it, have plenty of money. Wages have been rising in recent years, though not with productivity. We are out shopping and flashing the card with hardly a glance at what we are charged.
Until inflation haunts every spending decision – by the Government and consumers – it will not be stifled. That may require a recession again.
