Matt Nolan

Remember what inflation is

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There are a larger and larger number of analysts and journalists complaining about inflation at present.  The view seems to be that since the price of some goods are increase (fuel and food primarily) there is an inflation problem, and “something must be done”.  Because people have heard the RBNZ mention inflation they figure that the Bank should do something.

But I’ll tell you right now, as one of the most hawkish people I know I still do not see an inflation problem.  Yes, GST has pushed up the price level.  Yes, food and fuel prices have spiked – and they are hurting peoples real incomes!  But none of this is inflation.

What is inflation?  Inflation is the trend rate of growth in the price level.  In less wonkish terms, inflation of x% is when the price of all goods and services rise consistently by x% excluding any changes in “relative prices”.

The increase in GST was one-off, so its not inflation.  The increase in petrol and food is a relative price increase because petrol and food are relatively more scarce.  Does the increase hurt the economy and the people in it – hell yes.  Does it lower our real incomes and welfare – yes.  Can we do anything about it – no.

Unless the Reserve Bank can discover a large oil deposit and process it for our use they can do nothing about this.

So what we have at present IS NOT an inflation problem.  What we have is a negative economic shock, where we are being forced to reduce our standards of living because the resources we use are more scarce.  Having the price represent this scarcity means that we will take that into account, try to substitute away from the good, and hopefully come up with technologies that reduce our reliance on it.  But there is nothing the Bank can do about this.

Matt Nolan

What’s going on with the dollar?

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There was an interesting little shift in the dollar recently – one that was a little bit surprising at first look.

In the past month the dollar has been falling, first as a result of the Canterbury earthquake, then due to the 50bp cut in the official cash rate by the RBNZ.  This all makes sense.  But then the dollar dropped very sharply from around the 15th of March – this was well after the MPS, and nothing had happened in NZ.  What was going on?

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Matt Nolan

Words of wisdom on St Patricks day

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Happy St Patrick’s day all.

On this fine day, there is a song I’d like us all to remember – Seven deadly sins.  My favourite part of the song goes:

Some say that drinking’s a sin
But a gargle is fine now and then
For drinking has been in this world
For ever and ever amen

No if it wasn’t legal then the lawyers they would sue
And the prison would be full of folks who had a drink or two
And if they didn’t like it then away the girls would run
And if it wasn’t plenty the poor folk would get none

If you’re not sure, have a read over a few more of our posts on the issue(*, *, *).  Or for more advice from the Dubliners go here.

See you all next week!

jamesz

Battle of the Working Groups

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We’ve had the reports back from a few expert working groups now and what was pointed out to me about the tax report, compared to the savings report, is that it had entirely different tax policy recommendations. The Tax Working Group was at pains to align our taxes such that they did not distort peoples’ decisions while the Savings Working Group specifically wanted tax incentives to encourage saving. So who is right? Or can the two views be reconciled? Read more

Matt Nolan

A brief defence of a (temporary) cut

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I’m not sure if today’s rate cut was the right decision – I understand the justification for it, it is just hard to get past my inherent hawkish personality 😉

Still, I think that the rate cut is being slightly mischaracterised by those disagreeing with it – so I’m going to discuss it a little here.

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Matt Nolan

Post quake OCR cut

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The Reserve Bank cut the OCR 50 basis points today, primarily on the back of the Canterbury earthquake.  Their justification was based on a negative national confidence hit, on top of an already weak national economy.  This framework was consistent with the thinking of many economists – so even with all this uncertainty, it appears that policy was relatively pick-able this time.

I suspect that they waited to cut at the meeting instead of doing it prior to the earthquake so that they could indicate this was “one-off”, and prevent a sharper drop in the currency and expected rates.  However, no-one said that so I’m just guessing 😉

Demand is a nebulous concept, and they cut today as there is uncertainty regarding how heavily “demand” around the economy will drop following the earthquake.  Economists will not have a good idea what is going on here for some time – so the Bank should be ready to respond once it is clear that this demand shock has worked through.  We will see what happens.