In his quarterly forecast released last week, Westpac economist Satish Ranchhod said the quarterly inflation figure was set to be “another monster”.
While the eventual number came in below the expected 7 per cent figure, Ranchhod’s colourful description wasn’t inaccurate.
The figure of 6.9 per cent that was eventually reported on Thursday is the highest the country has seen in 30 years.
Speaking to the Front Page Podcast, the Herald’s business editor-at-large and Money Talks host Liam Dann says it’s little surprise this has become one of the biggest political talking points this year.
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Opposition parties are using high inflation as a core attack line in their strategy, arguing that the Government should do more to help New Zealanders.
Dann notes that anything the Government can do is largely limited by the number of international factors impacting inflation around the world.
“When you look around the world, the US is currently at 8.5 per cent, Spain and the Netherlands are both around 9.8 per cent, Germany is at 7.3 per cent and the United Kingdom is at 7 per cent. It is clearly an international phenomenon,” says Dann.
Dann notes that it’s difficult to see how New Zealand can independently fix a problem that’s affecting so many far larger countries around the world.
“The political debate in New Zealand is happening on the margins,” says Dann. “National is making the case that this is a time when governments need to spend very cautiously and very efficiently. There’s plenty of scope for political debate on how well the Government is deploying its fiscal policy.”
Whether Labour is or isn’t able to control inflation won’t matter as much to voters as the impact that inflation is having on them.
Looking at the historical context, Dann says that high inflation generally spells bad news for the incumbent government when it comes to winning votes in the next election.
If you’re comparing issues like unemployment and inflation, you can run a campaign when unemployment is at 12 per cent because only 12 per cent of people will be upset with you,” Dann says.
“But with inflation, everybody feels it. Every single person in the economy is going to be feeling grumpy about high inflation because we’re all paying it – even if it’s a less severe economic impact.
“It’s never been good for governments. If we hark back to the 70s, it really wiped out Jimmy Carter in the US, and I think it’s starting to hurt this government.”
Whether this issue does impact the Government’s re-election hopes will largely depend on how long this high level of inflation lingers.
Finance Minister Grant Robertson said early this month that inflation was nearing its likely peak, but this of course carries the corollary that New Zealanders could yet face more pain.
Since prices started going up, there has been widespread debate in the international community about whether inflation was transitory or longer-lasting.
“It’s going to be very interesting to see whether it does stick around longer than the next election cycle or whether it starts to ease as most economists are forecasting at the moment.”
Dann says the best forecasts suggest that inflation will start to ease later this year and into 2023.
If that does happen, the political pressure will then shift from Labour to National.
“The fascinating thing about the political aspect at the moment is that it feels like a roll of the dice for both parties at the moment,” says Dann.
“It’s still largely an international phenomenon which may or may not unwind before the next election cycle. And if people start to feel like it’s easing and the rest of the economy is in good shape, then this would be very good news for Labour.
“If National continues to make the case that all this inflation is Labour’s fault and it does eventually unwind, then they find themselves in a position of [implying] that Labour should get the credit for unwinding it – which I don’t think they’d deserve, but that would be what would logically follow.”
Which is to say that the next election could well be decided by something that neither major political party can fully control.
The verdict is still out on who the inflation monster will ultimately consume.
The Front Page is a daily news podcast from the New Zealand Herald,available to listen to every weekday from 5am.
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