The government’s inflation value is based on the consumer price index (CPI), a basket of currently 649 items, including food, housing, health, recreation, clothing, transport, education, and communication. Although each item is weighted based on previous spending patterns, the CPI is an average over various items, which might not correctly reflect the price increase of goods that matter most to us, like groceries, transportation, and entertainment.
Annual inflation of groceries is 12.3%, fruit and vegetables a whopping 20.2%, restaurant meals 8.5%, passenger transport services an eye-watering 20.6% and entertainment 8.8%. So, while the price increase of the total basket is slowing down, many items we buy daily are not.
Now to the second part of my opening question, is the current OCR high enough to control inflation? This seems to depend on whether your employer is a commercial bank, the RBNZ or neither. ASB recently estimated the ‘neutral OCR’ – an OCR which would neither stimulate nor slow down the economy – to be 3%, so the current rate dampens our economy and might be too high. The RBNZ, on the other hand, offered a range of possible values from 2.7% to 5.4%, indicating that the OCR is about right, also fuelling speculation that it will peak at 5.5%.
GDPLive’s current Taylor Rule-based optimal OCR value is tracking at 9.4% (gdplive.net). The Taylor Rule does not determine a neutral OCR value but identifies the OCR value that returns inflation to agreed target values. New Zealand’s mandated inflation target range is one to three percentage points (Remit for the Monetary Policy Committee). The Taylor Rule OCR is a clear and powerful reminder that the RBNZ has no intention of meeting its obligation to keep inflation on target.
Inflation is not under control, and the OCR is not doing what it is supposed to do. In the 1990s, the RBNZ introduced the revolutionary idea of inflation targeting – later adopted by many central banks across the globe – in response to the destabilising impact of high inflation during the 1980s. It seems the RBNZ has forgotten its history.
Christoph is a Professor of Innovation and Economics at Massey University, the Director of the Knowledge Exchange Hub (Massey University's big data-driven research centre) and the ambassador for Australia and New Zealand of the Kronberg Academy (Germany). This article was first published HERE
Annual inflation of groceries is 12.3%, fruit and vegetables a whopping 20.2%, restaurant meals 8.5%, passenger transport services an eye-watering 20.6% and entertainment 8.8%. So, while the price increase of the total basket is slowing down, many items we buy daily are not.
Now to the second part of my opening question, is the current OCR high enough to control inflation? This seems to depend on whether your employer is a commercial bank, the RBNZ or neither. ASB recently estimated the ‘neutral OCR’ – an OCR which would neither stimulate nor slow down the economy – to be 3%, so the current rate dampens our economy and might be too high. The RBNZ, on the other hand, offered a range of possible values from 2.7% to 5.4%, indicating that the OCR is about right, also fuelling speculation that it will peak at 5.5%.
GDPLive’s current Taylor Rule-based optimal OCR value is tracking at 9.4% (gdplive.net). The Taylor Rule does not determine a neutral OCR value but identifies the OCR value that returns inflation to agreed target values. New Zealand’s mandated inflation target range is one to three percentage points (Remit for the Monetary Policy Committee). The Taylor Rule OCR is a clear and powerful reminder that the RBNZ has no intention of meeting its obligation to keep inflation on target.
Inflation is not under control, and the OCR is not doing what it is supposed to do. In the 1990s, the RBNZ introduced the revolutionary idea of inflation targeting – later adopted by many central banks across the globe – in response to the destabilising impact of high inflation during the 1980s. It seems the RBNZ has forgotten its history.
Christoph is a Professor of Innovation and Economics at Massey University, the Director of the Knowledge Exchange Hub (Massey University's big data-driven research centre) and the ambassador for Australia and New Zealand of the Kronberg Academy (Germany). This article was first published HERE
2 comments:
Meanwhile in the real world, inflation is double what the government stats are reporting, no surprises there. Inflation won't be coming down anytime soon, and we could even be headed towards hyperinflation.
Good stuff Christoph, you need a like button here lol. anything I could add would be pointless except for to say .... Sounds like a crisis to me. It looked like one coming before it came like a car crash.
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