Government spin is trying to tell us that the highest inflation rate in three decades is due to global pressures. It’s not.
Inflation hit a 31-year high at the end of 2021, with a strong rise in domestic costs expected to create headaches for the Reserve Bank.
Statistics New Zealand said the consumer price index (CPI), the official measure of household inflation, rose by 5.9 per cent in 2021, the highest since 1990, shortly after the Reserve Bank was given new powers to use interest rates to keep prices stable.
While the figures were largely in line with expectations – several economists had predicted inflation hit at least 6 per cent last year – the breakdown of the theoretical basket of goods used to calculate the CPI suggested the current wave of increases is more of a domestic issue than some had expected.
Shortly after the figures were announced, Prime Minister Jacinda Ardern told reporters that the rise, predicted by commentators, was largely the result of global inflation pressures.
While tradeable inflation – generally reflecting costs imported from overseas – rose to 6.9 per cent, this was actually below expectations. Non-tradeable inflation, made up of the components of inflation that are mostly domestic, was 5.3 per cent, well above expectations and at the highest level recorded since Statistics NZ began providing a breakdown of local and imported elements. . .
A large contributor to the domestic component is government spending:
The Finance Minister must rein in his spending to avoid adding more fuel to the inflationary fire that is hurting everyday New Zealanders, National’s Finance spokesperson Simon Bridges says.
“At 5.9% for 2021, inflation is the highest it has been in three decades. It’s a thief in New Zealanders’ pockets, and it’s the least well-off Kiwis who will be doing it the toughest.
People on low and middle incomes are already over-stretched. Inflation will make life even harder for them.
“Parents will have to put food back at the supermarket, workers will only be able to partly fill up at the petrol station, and there’s even less hope for young people trying to buy their first home.
“With wage growth of only 2.4%, well under half of inflation’s growth, New Zealanders are going backward. At the same time, we’ve got rising interest rates and record amounts of government spending.
“Grant Robertson’s spending has been 40% higher throughout his time as Finance Minister than it was under National. This year he’s planning to increase that to a staggering 68% at $128 billion, with $6 billion in new spending.
“While elevated spending was appropriate through much of the pandemic, some easing off and greater focus on the quality of spending is now required.
The elevated spending wasn’t all appropriate. Some that was authorised for Covid recovery was spent on other much lower priority projects and some, like the $50m on the bike bridge to nowhere, was simply wasted.
“The big spend increasingly won’t achieve anything in a constrained economy where each public dollar is just competing with New Zealanders’ investments in scarce resources and workers.
“Even worse, big spending now will simply push inflation higher, which will act as a double whammy, hitting New Zealanders in the pocket twice through the inflation effect and as the Reserve Bank is forced to continue hiking up interest rates, higher than would otherwise be necessary.
“Grant Robertson’s glib response on inflation in the past has been that ‘it’s international’. If that’s a complete answer, then he needs to explain why the domestic part of New Zealand’s inflation is also rising and why Australia’s is considerably lower than ours at 3.5% over the same period.
“More importantly though, he needs to act by focusing on the quality of his spending and reining it in so that everyday Kiwis don’t keep getting burnt by price rises that far outstrip wage increases.”
Wages haven’t kept up with inflation but they have pushed some people into higher tax brackets:
Grant Robertson must urgently respond to spiking inflation with an adjustment of tax brackets, says the New Zealand Taxpayers’ Union in response to Stats NZ’s latest inflation figures.
Union spokesman Louis Houlbrooke says, “At the Reserve Bank’s last forecast, inflation was expected to hit 5.7% in March, but inflation has already hit 5.9% – that’s two months early.”
“Inflation doesn’t just hammer New Zealanders with higher prices – it also means we pay more in income tax. As salaries scramble upwards to keep up with rising costs, New Zealanders end up in higher income tax brackets, despite being or worse off in real terms. Workers are whacked once with inflation, and again with a tax hike.”
“The dirty secret of inflation is that Grant Robertson benefits from it. More tax revenue means he can make bigger spending promises – spending that itself serves to bid up the cost of goods and services, fueling inflation further.”
“There is one simple thing the Grant Robertson can do to avoid the perception he’s got a vested interest in driving up inflation – he needs to urgently adjust tax brackets and index them to shift automatically to counter the effects of rising costs.”
Inflation is theft.
It steals the real value of wages and without an adjustment to tax brackets the government will be making life harder for people by taking even more from them
Homepaddock 