2. Inflation fears 'holding us back'

Independent economist Shamubeel Eaqub argues New Zealand has missed out on economic growth due to excessive fears of high inflation. Photo: Thomas Coughlan

Weak levels of inflation expected to be revealed in new data are an indication of missed economic growth, an economist says. Thomas Coughlan reports.

Data released by Statistics NZ on Tuesday is expected to show weak inflation of 0.5 percent over the quarter and 1.6 percent over the previous year, lifting from 1.1 percent the previous quarter.

The data comes from the Consumers Price Index (CPI), which measures the change in price of a "basket" of certain goods and services as a way of looking at how prices increase or decrease over time.

Inflation has been running low since the financial crisis. Average inflation from 2000 is 2.7 percent, far above the 1.6 percent expected.

Independent economist Shamubeel Eaqub said the expected inflation figure was a problem and spoke to missed economic growth.

“We’ve been undershooting the inflation target for many years now and at a time when realistically we should have been giving a lot more stimulus into the economy,” Eaqub said.

The economist told  Newsroom the fear of having too much inflation meant New Zealand had had too little and missed out on economic growth.

“We’re so scared of having too much inflation that we keep on having too little inflation and we’re getting stuck in this trap where it doesn’t seem to be coming through in wage expectations, in wage negotiations and we are all stuck in this weird low growth, low inflation environment and that’s not a good outcome,” Eaqub said.

Controlling inflation is one of the chief tasks of the Reserve Bank, which is tasked with keeping inflation between one and three percent and ideally as close to two percent as possible.

Some inflation is good. It’s symptomatic of wages rising as workers get paid more and the economy grows, but too much inflation can send the economy into chaos. When prices rise, spending power erodes as each dollar buys slightly less.

But Eaqub argued the bank tended to err too strongly in favour of low inflation, failing to equally balance the the risks of over- and under-shooting its inflation target.

“We really want to see inflation in the middle of the target band rather than undershooting it for such a sustained period of time,” Eaqub said.

“We’re very happy to somehow give the Reserve Bank a pass for undershooting inflation, but really clamp down on them when they overshoot, well the tradeoff has to be symmetric as well."

Inflation is on the way, just not today

Most bank economists as well as the Reserve Bank expect inflation to pick up later in the year as minimum wage increases feed into the economy, causing it to grow. The effects of the Families Package, KiwiBuild and other government policies coming on stream is also likely to have an effect.

There are also fears that the breakdown in international trade could feed into prices.

ASB senior economist Mark Smith said last week that wage increases, including fair pay agreements, could boost CPI inflation by 0.3 to 0.7 percentage points, pushing it close to the 2 percent target.

Some are picking inflation to run even lower. ANZ’s Miles Workman and Liz Kendall project just 0.1 percent this quarter, equating to 1.2 percent year on year.

Workman told Newsroom ANZ’s softer outlook was due to factoring in its own data from the inflation gauge.

KiwiBank’s projection is dead on the market’s midpoint. The bank anticipates 0.5 percent inflation over the quarter, 1.6 percent year on year. Economists Jarrod Kerr and Jeremy Couchman expect this inflation rise to eventually exceed the 2 percent midpoint by early next year.

Meanwhile the bank that actually has the most control over inflation, the Reserve Bank, expects annual CPI to hit 1.5 percent in this quarter, rising to 1.6 percent in September and finally hitting two percent in December 2019.

But Eaqub for one, won’t be holding his breath.

“We still keep hearing how inflation is going to happen and how it’s just around the corner, but I think it’s a case of the boy who cried wolf," he said.

“I’m not convinced we have inflation around the corner until I see it and it’s sustained."