Small on Inflation

May 24th, 2010 at 2:23 pm by David Farrar

Vernon Small critically looks at ’s claims on :

Labour’s Phil Goff and his inner circle had settled on attacking over the forecast spike in inflation, figuring there was a ready market for suggestions the tax cuts would be swallowed by rising prices.

But the case Labour has tried to make risks backfiring, because frankly, the evidence looks a bit fishy.

I had planned to write along these lines, but glad Vernon has done it for me.

The Treasury forecasts that inflation will surge to 5.9 per cent next year before falling back and staying at 2.4 per cent for three years; well within the Reserve Bank’s 1 per cent to 3 per cent band. It also notes that “underlying” inflation would remain relatively subdued and have a limited impact on interest rates

Next year’s spike includes 2 per cent from the rise in GST, which is compensated for by tax cuts and increases in superannuation, benefits and support for others on state-supported incomes.

More than compensated for.

It also includes a contribution of 0.5 per cent from the rise in tobacco excise (that Labour enthusiastically supported in Parliament)

Which will only affect smokers, and for those whom quit smoking will save them money.

and another 0.4 per cent from the fuel and power prices associated with the Emissions Trading Scheme, which Labour would implement with bells on, pushing inflation much higher. (In any case, the inflationary impact of the was already included in the December half-yearly update.)

Now this is crucial. Quite a few people are unhappy at the impact of the modified ETS scheme, which adds 0.4% on 1 July to overall costs through higher petrol and power charges, but what Labour have not mentioned is their unmodified ETS would add 0.8% to inflation. They had passed a law which would have doubled the price increase due to the ETS.

Take those and the impact of GST away, and underlying inflation next year would be about 3 per cent, close to the top of the Reserve Bank’s 1 to 3 per cent band, but not so unusual.

The other thing Labour has not mentioned is they have constantly called for more government spending. This would mean a higher deficit and more borrowing, which would be inflationary. So their crocodile tears over inflation are less than convincing – their stated policy is to spend more, and to have an ETS which doubles the impact on power and fuel prices at 1 July.

On the other side of the ledger, as the economy improves, the Treasury expects wages to increase by 2.6 per cent next year (the year Labour chooses, because of the unflattering comparison with the 5.9 per cent inflation spike) and then rise by 3.5 per cent, 3.7 per cent and 3.9 per cent in subsequent years, while inflation is tipped to stay at 2.4 per cent.

These are just forecasts, and should be taken with the usual shaker of salt. But if you take one year into account you should be prepared to take them all.

On that basis, wages could well outstrip inflation in the next four years, and beat underlying inflation by even more.

As is generally the case.

Does Labour really want to argue that, as well as compensating for any GST rise, the Government should offset all the effects of inflation? That was above 3 per cent in 2001, 2006 and 2008 – when Labour was in power – and there was no similar call then.

Personally I would be delighted if Labour adopted a policy of giving people tax cuts every year to compensate for inflation. But somehow I don’t think they intend to.

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33 Responses to “Small on Inflation”

  1. Rex Widerstrom (5,253 comments) says:

    Here’s another spin on it, and a much shorter one: Both major parties are set on implementing increases in the cost of living for the people who elected them, which will push up inflation and inevitably result in unelected people at the Reserve Bank raising interest rates, which will make it even harder for those same people…

    And the “choice” we have is who’ll get to do the damage, and to what extent. And we call this “democracy”.

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  2. KiwiGreg (3,169 comments) says:

    “It also includes a contribution of 0.5 per cent from the rise in tobacco excise (that Labour enthusiastically supported in Parliament)

    Which will only affect smokers,..”

    Yeah lets cherry pick the CPI stats. That will make the debate more robust.

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  3. m@tt (587 comments) says:

    So National have fucked it up & Labour wouldn’t do any better. No news there.

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  4. Bevan (3,965 comments) says:

    m@ttSo National have fucked it up & Labour wouldn’t do any better. No news there.

    Correction: Labour fucked it up good and proper, when National try to fix it they are damned if they do and we are fucked if they don’t.

    Why do you think Cullen laughed about “spending the lot” after his last budget?

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  5. ben (2,396 comments) says:

    The other thing Labour has not mentioned is they have constantly called for more government spending. This would mean a higher deficit and more borrowing, which would be inflationary.

    That’s true if the government decides to finance the deficit by printing money i.e. debasing. Now governments have historically done this but I don’t think that’s what Labour’s proposing and there’s no great need for them to when debt levels are currently quite manageable.

    Inflation is ultimately a monetary phenomenon, a question of how many dollars are chasing a set of goods and services. I doubt there is a strong relationship between government share of the economy and inflation per se.

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  6. petulantpacifist (12 comments) says:

    Interesting how you say that those on benefits will be compensated, but what about minimum wage earners, the ‘working poor’. Bearing in mind that this year the real minimum wage dropped, what will low earners do if National continues to ignore their plea for better wages? Will they be able to cope with a 5% drop in their real wage?

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  7. RKBee (1,344 comments) says:

    DPF.. a few people are unhappy at the impact of the modified ETS scheme

    Thats an understatement .. DPF.

    DPF..Personally I would be delighted if Labour adopted a policy of giving people tax cuts every year to compensate for inflation.

    Bullshit.. you would still vote National.

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  8. Jd (23 comments) says:

    “Why do you think Cullen laughed about “spending the lot” after his last budget?”

    His legacy will be one of spite. Kiwis do feel a personal affection for some politicians irrespective of their politics – Muldoon and Lange come to mind – but what do we feel for Cullen? Nothing because he was driven by envy and spite.

    I’d put it down do having to accept that scholarship to to Christ’s.

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  9. krazykiwi (9,189 comments) says:

    @Bevan — Why so clingy with National, sir? I voted for them last election, and feel totally and utterly betrayed. Their sailing to the left is economic and electoral treachery IMO. On their watch we’ve seen no reduction in the bloated public service, lying on the ETS and s59. Key appears to lack the spine required to effect essential structural changes required after 9 years of Labour’s ideological rampage.

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  10. side show bob (3,660 comments) says:

    So when the National Socialists have finished saving the world I would assume they will drop the this new tax, yeah and pigs might fucking fly. How long will the ETS stay in place? When will we know the world has been saved ?, next year?, 5 years?, 10 years? , 100 years?. And by what criteria will they claim the world is saved ?. This is simply a cash grab. But hey it’s only adding o.4% inflation this year and what will the fucking inflation be come 2013 when all the evil farmers and their farting animals are made to toe the line? What a fucking con.

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  11. Viking2 (11,125 comments) says:

    Which national socialist stooge is Bevan. Cause only a stooge could write like he/she. Never know these days as it seems the Nats have large closets.

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  12. Bevan (3,965 comments) says:

    krazykiwi: @Bevan — Why so clingy with National, sir? I voted for them last election, and feel totally and utterly betrayed.

    Not clingy at all, in fact Ive often called Key a softcock for how he is running things. But the fact is Labour have fucked it, and National can’t fix it. The problems didnt start in 2008, the foundation was rotting well before then – I was just pointing that out. Fact is what you have typed is corrcet, but if Key was to do all those things (and rid the country of WFF, Kiwisaver, etc), then they would be a one term government and we’d be back with Labour.

    Where would the country be then?

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  13. Bevan (3,965 comments) says:

    viking2 : Which national socialist stooge is Bevan. Cause only a stooge could write like he/she. Never know these days as it seems the Nats have large closets.

    Do you ever form you own opinion? Or are you that retarded that you can only leg hump?

    Oh I see, you’ve alluded to me being a Nazi and gay at the same time! Oh wow, you are a real tower of intellect arnt you!

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  14. krazykiwi (9,189 comments) says:

    But the fact is Labour have fucked it, and National can’t fix it.

    True about Labour … and then defeatism about National. National could fix things if Key put his desire for continued rule on ice and concentrated instead on the tough medicine we so desperately need. Part of the medicine is re-educating the masses rather than pandering to their false belief that there’s a welfare money-pixie perpetually at the ready.

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  15. Bevan (3,965 comments) says:

    krazykiwi : True about Labour … and then defeatism about National. Sorry Bevan, but National could fix things if Key puts his desire for continued rule on ice and concentrated instead on the tough medicine we so desperately need. Part of the medicine is re-educating the masses rather than pandering to their false beliefs.

    Of course they could fix things and I hope they finally do, but will they? Do you really think National is going to all of a sudden grown a pair, I doubt that will happen until after the next election. They are too afraid of sticking their neck out to do the things that are desperately needed, and frankly if they did I think the public will reject them next election anyway, then we could well be stuck back with the same guys who got us into this mess in the first place.

    Frankly I’m over NZ politics, I dont see any party who I would support as a whole anymore. But I think its rich when some lefty (M@tt does come across as a lefty most of the time) comes out and has a go at National for not fixing Labours fuck ups in half a term.

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  16. stephen (4,063 comments) says:

    His legacy will be one of spite. Kiwis do feel a personal affection for some politicians irrespective of their politics – Muldoon and Lange come to mind – but what do we feel for Cullen? Nothing because he was driven by envy and spite.

    Kiwisaver, Cullen Fund.

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  17. JiveKitty (869 comments) says:

    @Bevan: I suspect when they’ve used the term “National Socialist”, they’re conflating the National Party and its supporters with socialism rather than the Nazis.

    Re: the desire for continued rule. It’s more of a need if National is going to make substantial changes. The manner in which they’re going about it is wrong though. I can accept gradualism if they signal that eventually they will make significant changes, but they haven’t really signalled that, either through deeds or by shaping the political paradigm and discourse so the significant changes will be acceptable to voters.

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  18. adam2314 (377 comments) says:

    DPF.

    I am tired of your posts on the lines of… ” but what Labour have not mentioned is “..

    John Key and his party were elected for change, from the labour party agenda..

    To hell with what the labour party did or did not do..

    When is the national party going to follow its founding principles ???.

    They have the ball in their court..

    Is that the only ball ( BALLS ) they have ???.

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  19. Jd (23 comments) says:

    Kiwi saver was a bribe to Anderton.

    Cullen was a vindictive politician without grace.

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  20. RKBee (1,344 comments) says:

    No political party in NZ is going to stay in govt if it brings in far left or far right ideals and policies… they have tobe either centre left or centre right… to survive for any lenght of time. I would go as for as to say without MMP they wouldn’t even have a say.

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  21. Manolo (13,315 comments) says:

    “When is the national party going to follow its founding principles ?”

    What principles? The spineless National Party got none whatsoever, and worship Gaia as much as the Luddite Greens.
    Power for power sake is their only objective.

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  22. wreck1080 (3,722 comments) says:

    National , are very disappointing. They have left a large political vacuum of those who now actively dislike national but detest Labour even more.

    Act lost credibility when Hide lost his marbles.

    Who would a sensible person vote for now?

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  23. RKBee (1,344 comments) says:

    Who would a sensible person vote for now?

    Citizens’ Initiated Referendum (CIR) to be binding on the govt… Independents and yourself.

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  24. burt (7,791 comments) says:

    adam2314

    I some ways I agree entirely with your sentiment;

    To hell with what the labour party did or did not do..

    But every time the opposition opens it mouth it is blaming National for taking measures to counter crap domestic economic conditions created by Labour. As soon as Goff in particular stops blaming National for doing things Labour would have forced itself to do had they won in 2008, then we can say to hell with what Labour did.

    As for National, agree they have been lame. Steady but lame, exactly the corner Cullen forced them into with his scorched earth spending to leave the cupboard bare.

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  25. burt (7,791 comments) says:

    I’m also pleased to see a reasoned and balanced piece of journalism from Vernon. It is refreshing and I’m wondering if he is one of the few faithful who has been publicly critical?

    (excluding Trotter, he’s always harshly critical after a Labour defeat, it’s part of his style to re-justify his own support come the next election)

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  26. John Boscawen (146 comments) says:

    While Labour’s argument that inflation rises to 5.9% this year must be acknowldeged as a one-off, the fact remains that the Reserve Bank forecast that the first year impact of the ETS will be to add 0.4% to CPI in the year from July 1st this year.

    Nowhere in the budget documents did the government show what the net tax savings would be after deduction of the increase in living costs from the ETS.

    This ETS tax on electricity , petrol and everything else has not been compensated for at all.

    While the budget quotes the adjustments to superannuation as being “sufficient” to compensate for the GST rise, nowhere is compo for the ETS mentioned.

    And in any event those tax cuts come in 3 months after the ETS will take affect.

    Finally I noted the PM said on TV 1 this morning that the cost to the average household would be $3 per week.

    Tell that to the average dairy farmer. Meat and Wool NZ has calculated the impact on the average dairy farmer will be to reduce their income by $3900 from July 1st.

    Thats close to $80 per week. A lot more than $3 per week.

    It is no wonder farmers and rural people in particular are upset.

    The

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  27. sonic (2,818 comments) says:

    “The Treasury forecasts that inflation will surge to 5.9 per cent next year”

    Good, we know what size of wage rises we need then.

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  28. expat (4,048 comments) says:

    Sonic you twizle stick, tax cuts.

    However, speaking of inflation, ETS, why?

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  29. Pascal (2,015 comments) says:

    Krazykiwi: On their watch we’ve seen no reduction in the bloated public service…

    Here’s a hint. We live in this thing called a democracy. It means, for an honourable government to make a change they must have an electoral mandate. National did not have an electoral mandate for that. Thus, they cannot make the change.

    If you voted for them believing they were promising that you made a mistake.

    sonic: Good, we know what size of wage rises we need then.

    If you support the drop of wages when inflation drops back to 2.4% as predicted as well. Right?

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  30. burt (7,791 comments) says:

    sonic

    When inflation was running constantly around 2%-3.5% under Labour the MPs were getting circa 9% pay rises every year while they were calling for wage rise restraint to curb inflation. You loved it when Labour did this so I assume that if govt get 9% pay rises and the rest of us 2% under National you will also think it’s great ?

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  31. Bevan (3,965 comments) says:

    stephen: Kiwisaver, Cullen Fund.

    Billion dollar train set, the “We spent the lot” budget, dead rat policies that have drained our GDP, not planning for the bad economic times that EVERYONE knew were approaching, promising tax cuts to gain polling results then cancelling them after the election…

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  32. Bevan (3,965 comments) says:

    Make that every intelligent person with more than a handful of brain cells could see coming..

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  33. krazykiwi (9,189 comments) says:

    “The Treasury forecasts that inflation will surge to 5.9 per cent next year”
    [Sonic] Good, we know what size of wage rises we need then.

    Yeah, how is that strategy working out for Greece?

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