Russell Bell: The inflation debate and why both sides are wrong and right

Deputy Prime Minister and Finance Minister Grant Robertson has blamed global pressures for inflation. Photo / Mark Mitchell

OPINION

There's been a lot of talk about inflation lately, and rightly so. Inflation is a pervasive menace on household and business budgets and, when out of control (as it appears to be right now), it can cause a rising tide of hardship.

So, what do we do? Well, certainly you don't deny that it is a crisis – or at least not call it one as the Prime Minister did only a few short weeks ago. Also, it is good that the "Government appears to have done away with saying the inflation issue is "transitory" or "will return to normal" in the future – which interestingly was the song sheet of most left-leaning governments around the world. It is clear, even to those who don't follow international economic trends closely, that this is at least a medium-term problem and will probably span next year's election and beyond.

As can be expected, both sides of the political spectrum are presenting a different take on the issue. And both are correct on some elements and incorrect on others.

The National Party opposition has zeroed in on government spending, to which the finance minister somewhat rightly answers in a "what would you have us do differently (to manage Covid)?". Inflation is recognised as one of a number of long-tail negative consequences of the pandemic.

But it is wrong to solely blame a virus - we are where we are because of how governments responded. And faced with a once in a 100-year crisis, it is accepted that spending was needed to keep the country afloat – unfortunately, if the quality of that spending is poor and the duration of it is too long, it is like pouring petrol widely on an area with smouldering embers (the embers being inflation). Fast forward to 2022 and there are still supply-side restrictions (interestingly China is shutting down major ports because of an outbreak of Omicron) and this is placing even more pressure on supply and prices.

Then you have Russia invading the world's biggest grain producer, Ukraine, while letting the world know that it is a major producer of fertiliser. Cue food price inflation to come.

So yes, there are international forces. But to blame current record inflation on them solely, or at least to have that as your main culprit of choice is incorrect. And here is where the opposition is correct.

New Zealand compares poorly with its trading partners when it comes to inflation. The internal or local inflation drivers have a major part to play in that, possibly more than those inflationary drivers which are imported. For example, from a business sense, the increase in the minimum wage rate from $16.50 in 2018 to $21.20 today has been a challenge. Imposed increases like this need to be recovered by businesses (let alone the flow through to living wages and general wages) and raising prices achieves this. The coming legislation which will bring back unionised wage bargaining will also have an inflationary impact.

Then you have other government spending which is demonstrative of being slow to put away the shotgun approach of 2020. Some spending, like the dubious Waikato train that seldom runs on time and that very few ride on, huge public relations campaigns, the Auckland cycle bridge which never happened, and the material increase of public servants all contribute to the inflationary environment. All of these are cumulatively material and certainly not an exhaustive list – businesses and households do a "line by line analysis" of their spending, perhaps the Government should try this?

So, all eyes will be on the Budget in the coming weeks. The Government, aided by its majority, has the power to do something about the issue of inflation and time will tell if they are successful.