Out of painful inflation conundrum

advice was ignored and over-ridden in favour of ministerial direction.

Although the package might limit the grumbling for a few months, it sets up an even bigger challenge after October, and as New Zealand moves within a year of the next general election. Because inflation is not a problem that will go away any time soon. Treasury forecasts this week paint a grim outlook, showing inflation will stay higher for longer, peaking near 7% this year, staying above 5% until the end of next year, and not getting below 3% until 2025. That more-persistent inflation is also driven over the longer term by high non-tradeable (domestic-based) inflation, with the New Zealand economy still stretched to its limits.

The costs to households of higher inflation are considerable. In dollar terms, the increase in household costs expected over the three years from the start of 2020 to the end of this year is equivalent to the total increase for the decade between 2010 and 2020. Backof-the-envelope calculations show that, based on Treasury forecasts, inflation could add a further $89 to the average household’s weekly spending by the end of this year compared to a year earlier, and then another $64 on top of that by the end of next year.

Waiting for wages to rise to offset these increases might be an overly optimistic solution: Stats NZ data shows that during the past 12 months, about twothirds of jobs in the economy have had a pay increase, with 36% not getting an increase. That’s the smallest proportion of people not getting a pay rise on record, but still leaves a lot of Kiwis without any boost to their incomes.

Future wage growth might also not be as strong as expected. Treasury expects wage increases to continue at elevated levels, despite net migration being expected to return to positive levels next year, and for the unemployment rate to rise fairly rapidly to a peak of 4.8% in 2025. More people in the workforce, and more people looking for work, hardly creates the same pressure on pay as New Zealand is currently experiencing.

All of this begs the question: what’s next? Is it realistic to believe that households will be forced to go cold turkey in October, once the reductions in fuel prices end, and the cost-of-living payment finishes? Add to this the fact that the Reserve Bank will need to continue raising interest rates to wrestle inflation back under control, and household budget stress will continue to dominate headlines.

It seems more likely that despite this temporary support, there will be incredible pressure on further funding to alleviate some of the further inflation being faced. But the risk of further stimulus in an already-constrained economy should not be forgotten. Getting the balance right will be difficult, both politically and economically. Do too little, and you’ll be seen as mean. Do too much, and you’ll make the problem worse.

Finance Minister Grant Robertson is walking a tightrope between a rock and a hard place.