KEY POINTS:
It is a big weekend for the Labour Party faithful. In Henderson tomorrow the sausages will be sizzling and the bands playing as grassroots Labour supporters celebrate the launch date of three major policies - KiwiSaver, 20 hours' free early childhood education, and lower cost doctor visits for 25 to 44-year-olds.
It will be an upbeat affair. A proud gathering attended by the Prime Minister and her deputy, and a big group of Labour ministers and MPs keen to remind people what they've been doing down in the Beehive. It is also another chance to point the finger at National and say "here's our record, what would you do?"
But as Labour pauses for a moment of reflection and a rousing speech or two, a chilly wind is threatening, a wind that could numb the impact of Labour's new and existing policies as well as constrain what it can offer voters to win next year's election.
It is the persistent breeze of inflationary pressures, which has led one major trading bank to fret that when the economic turning point finally arrives in New Zealand it will be aggressive.
That sort of talk usually translates to struggling businesses, jobs lost, and tighter household budgets.
The threat that the economy poses to political parties' fortunes has been talked about before - early last year former National leader Don Brash warned that a recession could be looming, and blamed it on Labour.
That crunch never materialised and while the economy did slow, growth did not hit the lows that were feared. Now things appear to be on an upswing again, as illustrated by yesterday's GDP figure of 1 per cent gross in the quarter to March 2007.
The problem is that Reserve Bank Governor Alan Bollard has little headroom in which to operate in his requirement to keep inflation within a target band of 1 to 3 per cent on average over the medium term.
The economy may have played out a small slowdown, but inflation has remained persistent throughout and is still a major threat - through higher interest rates - to company profits and the mortgage belt.
Bollard has ratcheted up interest rates three times since the start of March and may have to do so again to get what he wants.
The growing concern is just how harsh an economic slowdown he will have to engineer to bring inflation under control - and in the end it may not be Bollard who wears the public anger for that.
A parliamentary select committee is looking into the monetary policy framework to see if there are better ways of fighting inflation, but realistically the Reserve Bank's work might be done by the time anything can be agreed and legislated for.
As Labour's senior figures plot how to win the election, they know they are already battling against the fact they are a third-term Government. A fourth term is an elusive prospect at the best of times, and with John Key-led National ahead in the polls, Labour clearly has a fight on its hands.
But Labour's craved fourth term will become all the more elusive if the economy takes a turn for the worse. It is easier to battle the mood for a change in government if the economy is ticking along nicely and people feel positive about the future - theirs and their children's.
Fighting the change mentality is harder if people are having increasing amounts of cash sucked out of their pockets through higher mortgage rates, or if they are feeling an added squeeze from higher rates, rents, transport costs or electricity prices, and have little money for entertainment as a result.
The risk that inflation and the economy pose to Labour's hopes of winning another term should not be exaggerated. The extremely tight labour market means a sharp change in the unemployment rate seems unlikely, and people will remain in jobs.
But there is a real threat that the combination of higher interest rates, a spectacularly strong New Zealand dollar and the sheer amount of debt that people are carrying could brew into an unwelcome storm of struggling export businesses and households battling to make ends meet.
It is with this in mind that Labour views KiwiSaver as the royal flush of political poker hands, as Finance Minister Michael Cullen puts it. The voluntary retirement savings scheme is an honourable move to get people on the track to saving rather than spending.
The turbochargers that Cullen added to it in May's Budget will lure more people into signing, and that will be good for the economy, because it should mean less pressure on interest rates and more money to potentially invest in New Zealand businesses.
In beefing up KiwiSaver, Cullen found a way to give some of the growing tax take back to people without them spending it and adding to inflationary pressures.
The scheme also shows that Labour has not run out of ideas but it is unlikely to be an election winner or loser. Neither will the 20 free hours of early childhood education.
Politically, by election time KiwiSaver will be more than a year old and there are increasing signs that National will adopt most of its features. Savers might also find their employer contributions are offset by smaller wage increases.
The early childhood education policy, while no doubt offering a welcome and substantial boost to parents, has been bogged down by a successful National campaign questioning whether it, is in fact, free.
Something new will be needed to woo voters, because a campaign based purely on past record and a warning that National would "put it all at risk" has a questionable level of inspiration.
This is where inflation and the economy will play a part. Cullen is likely to face a dilemma as he prepares to unveil his election-year Budget.
If inflation is still a problem, how does Labour go about winning an election by either spending more, or by finally moving to give a personal tax cut?
Either Labour drops its argument that a tax cut or spending spree would be irresponsible, or it sticks with it, looks miserly, and allows National to take the tax space.
It could try to address personal tax in a small way and promise more in the future. It could examine the merits of cutting personal tax while simultaneously raising the level of GST, to try to combat the extra money being spent.
On the other hand, if the inflationary outlook has miraculously eased it will likely be because Bollard has achieved the slowdown he wants - a prospect that could also be uncomfortable for Labour.
Labour is not averse to pulling rabbits out of hats - the 2005 election promise of interest-free student loans is an example. If it is feeling constrained, it may try to trap National into also having little space to manoeuvre.
Passing some of next May's Budget initiatives into law before the election, and trying to lock Key into accepting them, is one way of trying.
So, as Labour's supporters tuck into their sausages tomorrow, Cullen will preach the virtues of KiwiSaver and tell people that only under Labour are both universal superannuation and the entire savings scheme safe. Labour's biggest strength, its leader Helen Clark, will carry the same message.
Their biggest test may yet be to come, in the shape of an economic environment that could decide their future.
