Inflation

The Reserve Bank of New Zealand announced yesterday that its Monetary Policy Committee agreed to leave the Official Cash Rate (OCR) at 5.50%. They believe that they are getting price inflation under control. They note that the CPI, which they use as a measure of inflation, was 6.7 percent over the past year.

Unfortunately, that does not resolve the problems that inflation has created for ordinary people. Focussing on inflation over the latest year creates a false perspective. Since the December 2019 quarter (before COVID), the CPI has increased by 17 percent. Over the same period, wage rates for workers doing the same role with the same skills have risen by only 9.5 percent. That gap is why people feel there is a cost of living crisis.

The wage-rate increase for the accommodation and food services industry in the private sector rose was only 6.6 percent. For people in this industry, the gap between price increases and increases in their wages increases is even more severe, unless they can get longer working hours, or find a better-paid role.

The CPI does not measure the effects of changes in mortgage interest rates, so the gap above is only part of the burden that wage earners are feeling. For most, the increase in the additional interest that they will have to pay is the worst aspect of the inflation pain that they are experiencing. And there is no sign that mortgage interest rates will go back to the low levels to which house buyers have become accustomed.

A bank economist said today that in a couple of years, this inflation will be just a memory, but that is not right. In the unlikely event that the inflation rate returned to zero, prices will not return to the level that they were before the inflation started in 2019. Prices just stop increasing, so the price increases that have already occurred are locked in forever.

Unless, wage and salary earners can get an increase in their wages to compensate for the 17+ percent increase in prices that has occurred, they will be permanently worse off. That is why bank employees are currently frustrated by a 7 percent pay offer from their employers, especially when the banks have been making record profits.