Annual inflation has hit a three-decade high at 5.9 percent. Video / NZ Herald
OPINION
Crisis is fast becoming the most misused word in politics, cheaply used by oppositions and critics to suggest a government is out of touch if it does not treat a serious problem as a crisis demanding a drastic solution.
A war is a crisis, a destructive urban earthquake isa crisis, a pandemic is a crisis. A lack of affordable houses or the return of general inflation, are not crises. Governments probably wish they were.
In a genuine crisis it is easier to make decisions. It is usually clear what needs to be done and it becomes possible to use unorthodox, ad-hoc, temporary remedies that would not normally be recommended.
When John Key went to Christchurch in the afternoon of the 2011 earthquake and saw the scale of destruction, he told officials the Government would pay the wages of everyone in the CBD until their employers could relocate.
"Um, that is not what is normally done, Prime Minister," the officials pointed out. "I don't care," Key replied. "It's what needs to happen here." The present government copied him when it decided to pay the wages and compensate the losses of every business it shut down to stop the spread of Covid-19.
But the danger in demanding governments treat every difficult, deep-seated, developing problem like a crisis is that they will reach for a quick, ad-hoc, temporary remedy every time. That is what happened this week.
Stung by an opinion poll putting National ahead of Labour for the first time since the pandemic started, the Prime Minister finally accepted National's phrase for inflation, a "cost of living crisis", and on Monday the Cabinet cut petrol tax by 25c.
Petrol tax is one of the most efficient taxes in the economy. All the revenue collected goes into a fund that finances state highways and other main roads. It means motorists pay for the arterial roads they use and the amount they pay depends on how much they use them.
Petrol is the most visible - and probably the most potent - expression of inflation but oil is not the primary cause this time. Photo / Duncan Brown
The petrol tax cut might reduce the cost of driving for a few weeks before it is wiped out by rising prices at the pump. Petrol is the most visible - and probably the most potent - expression of inflation but oil is not the primary cause this time.
Inflation has returned for reasons that were absolutely predictable when governments almost everywhere created as much money and debt as they needed to carry their country through the pandemic. With factories and supply lines disrupted, it resulted in the classic inflationary nexus: too much money chasing too few goods.
There is only one effective solution, it is now well known, well tried and tested, and it is not quick or easy. It is to increase interest rates by as much as it takes. If central banks respond early to inflationary signs, the increase need not be much. But once the disease takes hold, as it has, rates may have to be lifted to the point that they cause a recession.
Governments can help reduce the severity of central bank measures by restraining their own spending, thereby reducing their contribution to economic activity. This year's Budget will be a very important one – not just for the numbers it contains but, even more significantly, the message it gives.
It has been 30 years since we had significant inflation. I'd almost forgotten how psychological it is. It is as much a state of mind as a state of rising costs. I was reminded of this when paying a nominal charge for injury treatment under ACC a few months ago.
When I remarked on the fracture clinic's increased charge, the receptionist replied, "Yes, well everything's going up, isn't it?" How often we hear that now. Many prices have risen not as a result of higher costs but in anticipation of them.
Inflationary expectations are self-fulfilling. The only way to counter them is for governments and central banks to be heard - and seen - to be utterly resolute in their determination to stop inflation, even if it means a short, sharp recession. It is not enough to say they are resolute, their actions must be convincing.
So far, the New Zealand Reserve Bank is responding well, lifting its base rate when other central banks, including America's, were still talking about it. Governor Adrian Orr is contemplating more increases this year and we will need them, probably in larger jumps than his last one.
The Government, though, seems less resolute. Its leaders are too young to have seen what inflation did to a Labour government in the 1970s three years after a landslide election. Grant Robertson disavows "austerity" but that word would be more useful than "crisis" right now.
