Inflation less than expected

July 17th, 2014 at 10:00 am by David Farrar

cpi

Inflation was 1.6% in the last year, which is less than expected. The lower inflation is, the more spending power households and businesses have.

This should mean that interest rates do not rise as much as projected, even though I still expect one more 25 basis points increase later this month.

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Prices stable

April 19th, 2014 at 4:00 pm by David Farrar

Stats NZ reports:

The consumers price index (CPI) rose 0.3 percent in the March 2014 quarter, Statistics New Zealand said today. Higher tobacco and housing prices were partly countered by seasonally cheaper international air fares, vegetables, and package holidays.

Cigarette and tobacco prices rose 10.2 percent, following an 11.3 percent rise in excise duty in January. “The CPI without cigarettes and tobacco showed no change in the March quarter,” prices manager Chris Pike said.

That means no cost of living increase, if you are not a smoker.

Also of interest is that despite the scare stories about power price increases of 24%, the quarterly increase in the cost of electricity for households is only 0.07%. Remember that figure.

Also food prices are down 0.3% in March, and are only 1.2% higher than a year ago.

 

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Milk cheaper, beer price soars

February 18th, 2014 at 3:00 pm by David Farrar

Stats NZ reports:

The milk’s a touch cheaper, but the beer’s more expensive than it used to be, according to Statistics New Zealand’s annual snapshot of our country.

New Zealand in Profile 2014, released today, shows the average price of two litres of milk fell from $3.23 in 2008 to $3.19 last year, while an average 400ml glass of beer went up from $4.47 to $5.78 in the same five years.

So since 2008 the price of milk has dropped 1.2% and the price of beer has gone up 29.3%. That’s sad!

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Fallow on inflation

February 3rd, 2014 at 3:00 pm by David Farrar

Brian Fallow, NZ Herald Economics Editor, writes:

So we have David Cunliffe in his state of the nation speech on Monday deploring that people are struggling with a rising cost of living while their wages stay still and then talking about “reforming” the Reserve Bank Act to assist exporters.

By reform, they mean to have more inflation – which of course makes the cost of living increase!

It is one of the ironies of our political discourse that the parties of the left are the most casual about inflation when it is the poor and economically powerless who suffer most when inflation gets out of hand and as it is brought under control again. Perhaps they are too young to remember. 

If more inflation is the answer, the question is wrong.

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CPI 0.1% for quarter

January 21st, 2014 at 2:00 pm by David Farrar

Stats NZ reports:

The consumers price index (CPI) rose 0.1 percent in the December 2013 quarter, Statistics New Zealand said today. Higher international air fares and rising housing and dairy prices were partly countered by lower vegetable prices and cheaper petrol.

International air fares rose 12 percent in the December 2013 quarter – the highest quarterly rise since the December 2009 quarter. “International air fares usually rise in December quarters. This quarter’s rise reflects seasonally higher air fares to Asia and Europe,” prices manager Chris Pike said. Package holiday prices (up 7.3 percent) also showed a seasonal rise.

Prices for housing and household utilities (up 0.5 percent) also rose, reflecting higher prices for property maintenance, purchase of newly built houses, and rentals for housing.

Annual inflation is 1.6%which is higher than I like it (I believe in aiming for 1%) but under the midpoint of the 1% to 3% range.

I prefer to look at the long-term series. Here are some comparisons of average annual price increases over the last five years (Dec 08 to Dec 13) compared to the previous five years (Dec 03 to Dec 08).

  • Electricity 3.9% compared to 7.8%
  • Household Energy 3.6% compared to 10.0%
  • Food 1.7% compared to 3.4%
  • Fruit & Vegetables 0.6% compared to 6.4%
  • Rental Housing 1.9% compared to 3.6%
  • Home Ownership 2.9% compared to 8.0%

Labour are very good at claiming they will lower food prices, electricity prices and housing costs – but their track record speaks for itself. Last election they campaigned to remove GST on fruit and vegetables. Well under the last five years of Labour they increased by 32%, and under five years of National just 3%.

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Inflation at 14 year low.

July 16th, 2013 at 2:02 pm by David Farrar

Stuff reports:

There is little in today’s inflation numbers to suggest the Reserve Bank will be forced to change the official cash rate (OCR) earlier than forecast.

Annual inflation has dropped to just 0.7 per cent, the lowest level since 1999, with higher power and housing costs offset by lower petrol and car prices in the June quarter.

The OCR is at 2.5 per cent, a historic low and economists are not expecting to see any rise until early to mid 2014. The central bank releases its next interest rate review on Thursday next week.

Consumer price inflation has been one per cent or below for a year now, and low inflation has allowed the OCR to remain at 2.5 per cent for some time, TD Securities head of Asia Pacific research Annette Beacher said.

Inflation low, interest rates low, economy growing and jobs being created. Not too bad.

The average inflation rate since December 2008 has been 2.2%.  If you exclude the GST increase which had compensating tax cuts then it would be 1.7%.

In the previous 18 quarters, it was 3.3%. That means prices increased around 10% every three years.

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Labour on costs

July 13th, 2013 at 9:00 am by David Farrar

David Shearer has said:

“Kiwi families have been hit with a triple dose of bad news in the last 24 hours, with petrol prices, power prices and food prices all jumping sharply,” says Labour Leader, David Shearer.

“Just in time for the school holidays, petrol prices went up four cents a litre to $2.26.9 for 91-octane.  That’s on top of the July 1 three cent increase courtesy of the Government hiking up petrol tax

Yes petrol prices have gone up – because the dollar has dropped 10% in the last couple of months. Now which party has been saying that the dollar is still far too high and the Govt should intervene to bring it even lower (and hence make petrol more expensive)? You’ve got it – Labour (and Greens and NZ First).

“The latest power price data shows domestic power prices rose by 2.2% in the last three months, which means the average household will pay an extra $50 a year. 

No it doesn’t. The electricity CPI was 1366 in Dec 2012 and 1368 in March 2013. That’s an increase of 0.1%, not 2.2%.

“And the cost of food rose by 2.1 per cent in June – 50 per cent faster than in June 2012 and June 2011.  In fact, it was the biggest single monthly food price increase since National pushed up GST in October 2010. 

Food prices vary greatly month to month. The sound comparison is food prices compared to a year ago as that takes account of seasonal variations. And food prices up just 0.6% higher than a year ago, which is historically a very small increase.

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Greens dump printing money plan – for now!

June 19th, 2013 at 11:10 am by David Farrar

Vernon Small reports:

The Greens have dumped their call for quantitative easing – or printing money – after it became an electoral liability for the party and a future Labour-led government.

Green co-leader Russel Norman yesterday confirmed the u-turn after Monday’s release of the joint Labour-Green-NZ First-Mana report into manufacturing left the policy out of the mix.

Prime Minister John Key and other Government ministers have latched on to the plan to ‘‘print money’’ to paint the Opposition as economically radical.

Norman said it was never Green policy but was included in a discussion paper, issued last October.

This suggests they were not advocating it. This is far from the reality. Russel Norman was constantly tweeting that we should be printing money, and providing examples of other countries that were doing so. There is no doubt that the Green’s proposed Finance Minister thinks we should be printing money. The only thing that has changed is they have agreed to stop talking about it in public.

But if a Labour/Green Government got into office, and couldn’t get the books to balance, what do you think is more likely – that they’ll cut spending or print money?

And enjoy Clark and Dawe as they explain what the Greens mean by quantitative easing!

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Print baby print

May 25th, 2013 at 6:25 am by David Farrar

Stuff reports:

Economist Ganesh Nana wants the Reserve Bank to intervene in foreign exchange markets for as long as it takes to bring the kiwi dollar down.

The Berl economist told deer farmers in Wellington the bank should become a daily trader till the exchange rate fell to “something sensible for our export sector”.

The dollar has traded close to US86c recently, falling to almost US80c this week, before rebounding to about US80.9c yesterday.

“Sooner or later the speculators – Japanese housewives and Belgian dentists – will find somewhere else to play.”

That may be one of the most risky and/or stupid strategies I have ever seen. In fact the more a Government intervenes in a currency, the greater the profits are for those speculating against it.

I can think of several countries that have tried that strategy – and all have lost.

The reason why they played in New Zealand was because they knew it was an easy win.

Asked if New Zealand had the resources to do this, Nana replied, “It’s called a printing press. I’m not kidding,” he said to laughter.

“You can afford it. The Government has the legal right to print as much dollars as it likes.”

The Green Party policy. Just print as much money as possible.

It certainly would lower the dollar.

It will also increase prices and bring  back rampant inflation.

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How they plan to pay for their promises

March 14th, 2013 at 4:00 pm by David Farrar

printmoney

 

This is the alternative. They honestly seem to believe that you can enrich a country by just printing more money. I thought this lunacy died out with Social Credit.

The only Western countries doing QE are those which have the official cash rate near zero and have run out of other options. No sensible country is advocating printing money in the circumstances NZ is in.

There is a difference between a last resort and a preferred option. As an analogy if someone is dying from blood loss through a severed limb then a tourniquet is your last resort to stop them dying. But if they have just cut their leg open a bit, you don’t apply a tourniquet as your first response because the impact of doing so is very nasty.

In monetary terms, the nasty impact is prices go up and up.

You can see the Twitter debate here.

Be scared, be very scared. Most Green policies will just be inefficient and waste money but not necessarily be hugely harmful. This one is different.

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Fallow on monetary policy

January 31st, 2013 at 4:00 pm by David Farrar

Brian Fallow writes in the NZ Herald:

Listening to a procession of manufacturers say their piece to the parliamentary inquiry into manufacturing this week, two things were clear.

One is that the high dollar is causing real and lasting damage to their sector.

The other is that the idea that an overvalued exchange rate is the fault of the monetary policy framework has hardened into dogma.

Cast off outdated neoliberal doctrine. Change the Reserve Bank’s mandate. Then New Zealand manufacturers will have a fighting chance. That was the message.

It echoes statements like this from Labour leader David Shearer last Sunday: “We’ll make changes to monetary policy so that our job-creating businesses aren’t undermined by our exchange rate.”

It is glib. It glosses over difficult questions about what changes they have in mind, and what the costs, risks, trade-offs and spillover effects would be

All correct.

And it misdiagnoses the problem, which is that the rather enfeebled state of much of the other 99.8 per cent of the world economy has led to policies abroad which are unhelpful from New Zealand’s point of view and which we can only hope succeed.

This is in fact the major point.  The US and Europe are poked (for now) and their dollars are weaker. Politicians preaching how we can rectify this are dreaming. If we want proof that this is about the weakness of the US$ and the Euro, not a strong NZ$ – look at this graph from ANZ:

nzaud

As you can see we are in fact historically quite low against the Australian dollar.

If the object of the exercise is to ensure that in the future the Reserve Bank runs monetary policy looser than it otherwise would, consider this: higher inflation would lower real wages, and real incomes more broadly, in the hope of protecting jobs in the favoured sector. Should the union movement support that?

Lower interest rates would increase the risk of a housing bubble that, this time, bursts messily all over us. Ask the Irish tradesmen flocking to Christchurch how much fun that is.

If it succeeds in making New Zealand exports cheaper to foreign buyers – a pretty big if – it will also make New Zealand assets cheaper to foreign buyers. That should give economic nationalists in New Zealand First and the Greens pause.

So nice to have someone print this out.

 

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Inflation

January 19th, 2013 at 10:00 am by David Farrar

 

Inflation1945

Stats NZ have published the latest CPI and inflation remains at 0.9%. The graph above shows what inflation has been since WWII. It is due to inflation that we are no longer competitive as an exporter unless the dollar is lower.

inflation1990

And inflation since 1990, showing the tail end of the 4th Labour Government, and those since.

Inflation over each three year term has been:

  • 1991 – 1993 3.7%
  • 1994 – 1996 8.5%
  • 1997 – 1999 1.7%
  • 2000 – 2002 8.7%
  • 2003 – 2005 7.6%
  • 2006 – 2008 9.5%
  • 2009 – 2011 8.0% (includes GST increase)
  • 2012 0.9% (for one year)

Printing money to fuel inflation is like a sugar fix. It gives you a temporary rush, but makes you sicker in the long term.

 

 

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Food prices

January 17th, 2013 at 12:00 pm by David Farrar

Stuff reported:

Food prices fell for a fourth month straight in December, led by a drop in non-alcoholic beverages which offset higher meat, poultry and fish prices.

The Food Price Index fell 0.2 per cent in the month, according to Statistics New Zealand following a 0.8 per cent decline in November. The current level of 1243 marks the lowest point on the index in almost two years.

I’ve calculated annual food price inflation since the series began in 1960, below.

foodinflation

 

So in one year, food prices increased 25%. I guess there was lots of money being printed that year.

If we look at post 1990 only:

foodprices90s

 

So three big spikes post 1990. One was in 2001, another in 2008 and the third in 2011. The latter one being impacted by the GST increase.

If you look at food inflation over each three year approx electoral term, the cumulative annual increases were:

  • 1991 – 1993: -0.1% (go Ruth)
  • 1994 – 1996: 4.3%
  • 1997 – 1999: 4.2%
  • 2000 – 2002: 11.1%
  • 2003 – 2005: 2.7%
  • 2006 – 2008: 18.4%
  • 2009 – 2011: 6.6%

Annual food inflation in 2012 is -0.9% so far. Useful to recall this when you see stories about the rising cost of food!

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Perception v reality

January 5th, 2013 at 10:00 am by David Farrar

Stuff reports:

Kiwis who did it tough in 2012 will find no comfort over the next year as financial anxiety rises with the climbing cost of living.

A survey by The Dominion Post paints a gloomy picture for many households: two-thirds of respondents said the cost of living is becoming too high.

And that bleakly held view is backed by various experts, who confirm that prices are likely to climb further over the next 12 months.

The survey polled more than 600 readers and found rates, petrol, food and house prices all among the most pressing financial woes. Taxes, medical and dental expenses, and the exchange rate were also prime concerns.

A reader survey, while interesting, is not a scientific random poll. And nowhere in the article do they mention what the actual inflation rate is, or that interest rates are at a record low. Here’s what Stats NZ found:

  • Annual inflation at 0.8%, the lowest it has been since 1999.
  • Food is 0.9% cheaper than a year ago
  • Clothing and footwear is 1.0% cheaper

I’m also fascinated by the fact the exchange rate was listed as a worry for prices, as the higher the exchange rate, the cheaper most things cost (a high rate is bad for exporters but good for consumers generally).

If you are going to do a story based on perceptions, it would be good to actually include some facts in the story – even ones that don’t agree with the perceptions.

 

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Inflation at 0.8%

October 16th, 2012 at 12:30 pm by David Farrar

The Herald reports:

Tradable inflation, which covers items open to foreign competition, was unchanged in the quarter, due to falling prices for second-hand cars, petrol and dairy products. On an annual basis, tradable inflation shrank 1.2 per cent.

Non-tradable inflation rose 0.5 per cent in the quarter at an annual pace of 2.3 per cent, mainly due to higher local authority rates.

Rates can not keep increasing as an unsustainable rate.

Transport prices fell 1.1 per cent in the quarter, with the price of petrol down 1 per cent, second-hand car prices down 2.8 per cent and domestic air fares falling 7.8 per cent. Fresh milk prices fell 3.8 per cent in the quarter, while telecommunication services prices declined 1.8 per cent.

Food prices rose 1.1 per cent in the September quarter, led by more expensive produce, while grocery food prices fell 1.6 per cent.

Dwelling insurance prices surged 17 per cent in the quarter, and are up 43 per cent on an annual basis as insurers pass on rising reinsurance costs in the wake of a series of earthquakes that levelled Christchurch, the country’s second-biggest city.

Yeah my building insurance costs have doubled, and our building is well above code.

What I find most interesting is the household energy costs. Do you recall earlier this year stories proclaiming massive increases in electricity prices, and the like. I was somewhat critical of those stories as they never gave any hard data as to what the actual increases were.

Well for the quarter, household energy costs increased a mere 0.3%. For the year a 3.9% increase. This compares to annual near 8% increases from 2002 to 2008.

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More analysis of Greens print money plan

October 15th, 2012 at 10:00 am by David Farrar

Marc Krieger of Krieger Capital blogs:

In any event, quantitative easing ultimately benefits the rich. For example, the Bank of England commissioned a study in which it said that 40% of the gains of its quantitative easing programme went to the top 5% of British households. The reason is simple. The rich own shares, property, and precious metals, whose values rise or remain constant when the central banks flood the world with money conjured out of thin air. Conversely, working people and savers rarely own financial assets whilst simultaneously having their real wages drop during an inflationary period. Dr Norman’s tacit support of even lower interest rates penalises retirees who depend on interest income to live. In essence, Dr Norman wants the Reserve Bank to continue the very imbalances that helped produce the Global Financial Crisis by punishing those prudent enough to save and rewarding the spendthrifts.

So this is what the pro-inflation policies of the left will bring – gains for the top 5% and losses for poorer working people. Are these not the same people who go on about income inequality?

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Mayes on QE

October 11th, 2012 at 1:00 pm by David Farrar

Former Reserve Bank Chief Economist David Mayes writes in the Herald:

Printing money is usually a last resort that seriously troubled countries use to stave off collapse, and not some mysterious trick that other nations have conjured up to achieve quick riches.

I never though a so called serious political party would advocate it, since Social Credit were killed off.

New Zealand has definitely not run out of opportunities to use conventional monetary and fiscal policy if it feels the economy faces a lack of demand. So why move to the unconventional now?

Quantitative easing is used when short-run nominal interest rates have been lowered to zero and it is still necessary to expand the economy.

And our cash rate is 2.5%

Quantitative easing is used when short-run nominal interest rates have been lowered to zero and it is still necessary to expand the economy. If the central bank then buys longer dated bonds or other financial securities (including commercial paper or mortgages from the private sector), it may continue stimulating the economy.

Evidence from a symposium being published by The Economic Journal suggests that this is achieving a little in the United Kingdom, the United States and the Euro area.

The problem is that it only works well if people fear major inflation and rush out to buy before prices rise. Once growth re-establishes again, the central bank sells all assets and mops up the extra money before inflation gets out of hand. That of course explains why it doesn’t really work. If inflation is going to be headed off, then why buy now? Hence the weak effect.

Thus quantitative easing needs to be on a massive scale if it is to work.

And this is what worries me. The Greens proposed printing $8 billion of money to stimulate the economy. Now what would they and Labour do, if that doesn’t work? Would they say it was a silly idea, or would they say the problem is they did not print enough money? They’ll then be printing another $10b, another $20b etc.

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Fed Farmers say no to printing money

October 10th, 2012 at 7:00 am by David Farrar

The Greens claim their printing money proposal (which Labour supports, so long as the RB decides to do it, not the Govt) is to benefit exporters.

Well the group that represents more exporters in NZ than any other, Federated Farmers, have said they think the proposal is lunacy.

3 News reports:

The country’s biggest export sector is strongly opposed to the Green Party’s suggestion that the Government should print money to bring down the value of the dollar.

The agricultural sector sells most of its products overseas and Federated Farmers says printing money, known as quantitative easing, would be “incredibly bad” for New Zealand. …

The Government has rejected the idea and Federated Farmers president Bruce Wills says it would “set off an inflationary bomb that risks returning New Zealand to the dark days of double-digit interest rates”.

Mr Wills says quantitative easing should be a “break glass in case of fire” policy option.

“New Zealand is nowhere near such desperate measures because our official cash rate is 2.5 percent versus 0.5 percent in the United Kingdom, 0.25 percent in the United States and 0.10 percent in Japan.”

This is what is so bizarre about the Greens policy. Those countries which are doing QE are not doing it because they want to. They are doing it as a last resort as they can not lower their cash rate any lower.

The Greens would have New Zealand as pretty much the only developed country in the world to print money and cause inflation, as a preference rather than a last resort.

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Dom Post on Greens plan to print money

October 9th, 2012 at 3:00 pm by David Farrar

The Dom Post editorial:

New Zealand should have learned from bitter experience that it cannot shield itself from the vagaries of the international market. Labour and National tried that in the 1970s and early 1980s and ran up debts that took a generation to repay.

New Zealand is a small trading nation a long way from its markets. The only way for it to survive and prosper is to be flexible, adaptable and resilient. If the balance of economic power in the world is shifting, there is no use pretending it is not.

The decline in the value of the US dollar and the euro is a reflection of the decline in the relative worth of the American and European economies.

The attempts by American and some European policy-makers to reboot their economies by printing money are acts of political desperation.

It makes no sense for a country which has weathered the global financial crisis better than most of its Western counterparts to emulate their risky tactics. Printing money – or quantitative easing as it is technically known – fuels inflation, devalues assets and reduces purchasing power. Once started it is difficult to stop, as Germans discovered in the 1920s when wheelbarrows replaced wallets as the most efficient means of carting cash.

The Greens plan will see shares in Mitre 10 and Xerox increase!

It is interesting that Labour has not ruled out printing money also – just that they don’t want their fingerprints on it. The summary is:

  • Greens will force the Reserve Bank to print more money, driving up prices for all NZers
  • Labour will amend the RBA, to encourage the Reserve Bank to print more money, driving up prices for all NZers
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Meet your future Green currency

October 8th, 2012 at 3:00 pm by David Farrar

Also a great comment by Alex Tarrant on Twitter:

BREAKING: Fuji Xerox approaches Green Party in early bid for printer procurement contract…

Heh. Also Victoria tweeted:

Brb, just getting a wheelbarrow to carry my notes to buy a loaf of bread!

Matt Nolan at TVHE blogs a very useful analysis of what the Greens have proposed (and Labour are semi-supporting):

 Russel Norman is completely misrepresenting QE by saying that the recent crisis is “evidence it isn’t inflationary”.  QE was put in place to fight the fact that policy was too tight overseas, and they were trying to fight deflation – in essence the fact that inflation stayed near the “target band” in these countries is evidence that QE is indeed inflationary as you would expect … just in the way they were intending.

Exactly. QE can be considered if you face deflation, and your official cash rate is as low as it can go. We are within our target band at 1% (which is what I think we should be aiming for) and the cash rate is 2.5%.

Remember how often Greens and Labour complain about increased costs such as electricity and food? Well this is a policy to increase their costs even more for families finding it hards to make ends meet.

Now you may believe we should fund the rebuild with a one-off tax – that’s fine, in that case get the government to put a tax in place directly (or to directly cut spending from other place).  However, taxation by stealth of this sort is likely to be worse in multiple ways:

  1. We have betrayed RBNZ independence for virtually no reason … understandably a sneak tax by the RBNZ would make people less likely to believe them in the future about holding to their inflation mandate.  As a result, we run into the time-consistency issue in monetary policy again, and it will become more painful for economy when the RBNZ tries to commit to its inflation mandate again.
  2. We have a relatively rough redistribution of resources due to this.  By putting in our sneak tax through QE, we transfer resources to those with assets, those doing the rebuild, and those who can easily adjust prices/wages – while hurting those on fixed income, and those who have saved.  It is an inflation tax – pure and simple – and as a result, it will initially transfer resources from those who can’t protect themselves (generally the poor) to those who can (generally the rich).  If we introduce the tax through fiscal policy instead we can sort out these distributional issues a little better.
  3. A country that is willing to introduce QE as a clear fiscal transfer – when there is no monetary policy reason – will destroy its credibility with international lenders.  People will scoff at this, but such a policy will increase the level of “inflation insurance” lenders ask for – increasing the cost of credit in New Zealand.

That is a very good way to put it – the Greens have proposed an inflation tax – one that will hit fixed income households the hardest!

The Greens, and Ganesh Nana, are wrong in stating that the RBNZ has failed.  Distinctly and totally wrong.  Things like this:

”No system of monetary policy is perfect and New Zealand cannot remain the last devotee to a failed monetary theory while the rest of the world moves on,” Norman said.

Paint a complete and utter misrepresentation about the lessons from the Global Financial Crisis.  Our flexible inflation targeting framework saved us from a massive crisis at home – while the rest of the world fell apart.

Matt’s conclusions:

  1. We don’t need QE in NZ, as we have enough monetary stimulus (and if not we can cut interest rates further).
  2. What is being suggested isn’t even QE – its the monetization of government debt, effectively a inflation tax to pay for the rebuild in Canterbury.
  3. It is unlikely that such a tax is the “best” way of raising the revenue to rebuild Christchurch – which should be the primary question.

Say no to the Green’s inflation tax.

Oh you must watch the video also, H/T Whale.

John Clarke as hilarious as always. He is also factually correct in this case.

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Greens literally believe money does grow on trees

October 8th, 2012 at 7:00 am by David Farrar

I thought this madness died with Social Credit, but Greens (and Labour may not be far behind) have said that they want the NZ Reserve Bank to effectively start printing money. They think that NZ printing more money is a good way to increase the relative value of the US dollar. We might as well start burning our savings.

Make no mistake, what they are calling for is the value of everyone’s savings to be reduce, as inflation takes off. You know all how they say wages are too low for low income workers? Well they want the cost of food, goods and services like electricity to increase faster than they have been.

There are basically two sorts of countries that print money. Those that are bankrupt, and those whose economies are so stalled that the central bank cash rate is as low as it can go.  In the US it is 0.25%. NZ is at 2.5% so a fair way away from that.

Russel Norman claimed:

Secondly, when you look overseas at the use of quantitative easing – because all of our major— most of our major trading partners are using it

This is simply wrong. The US and the the Eurozone and Japan have done it (and sort of the UK)  - again because they are almost bankrupt or their central rate can not be lowered anymore. But they are not our major trading partners.

Our exports for the year to June 2012 came to $46.7b. Exports to the Eurozone were $2.9b, UK $1.4b, Japan $3.4b and US $4.1b. That is a mere $11.8b out of $46.7b – under one quarter. Australia is almost a bigger export market than those four combined.

And let me tell you if we started printing money, and Australia was not, watch the outpour to Australia get far far worse.

Some policies put forward are just silly, or ineffective, or wasteful. Some are very very bad and dangerous. This is one of them. The idea of printing money to grow the economy has never worked long-term. It gives you a short-term sugar rush at best. It puts up the price of pretty much all goods and services as inflation grows.

It is actually to our advantage long-term that the US and Eurozone are printing money. Proposing to follow them voluntarily is the worst thing NZ could do.

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Low inflation

April 20th, 2012 at 10:58 am by David Farrar

The latest inflation figures show up for me how silly Labour’s election policies were. Do you remember how they campaigned on removing GST off fruit and vegetables, because people can’t afford them?

Well in the last year the average cost of fruit and vegetables has dropped 6.6%.

Overall food prices have increased just 0.6% in the last year. That is good for especially low income families, as food makes up a larger proportion of their budget.

Clothing costs increased only 0.1% over 12 months also.

Also do you recall all the stories about massive increases in electricity prices? Well over 12 months the average cost is up 1.8% only.

Inflation overall for the year was 1.6%. Still a bit higher than I would like it. I believe 1% is the appropriate level to aim for (mid-point of 0% to 2% range) but the Reserve Bank will be happy with 1.6% and interest rates should remain low for a while yet.

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A nice table

October 18th, 2010 at 12:54 pm by David Farrar

The day after Phil Goff announces he is campaigning on the cost of living, Stats NZ announces the lowest annual inflation rate since March 2004.

Bill English has done this handy table comparing the last two years, to the previous two years. National needs to do more stuff like this:

Price and wage changes over comparable periods

Labour National
Sep 2006 to Sep 2008 Sep 2008 to Sep 2010
Overall inflation (Consumers Price Index) 7% 3%
Overall food prices (Food Price Index) 15% 5%
Food prices
Bread and cereals 18% 4%
Milk 23% 7%
Cheese 50% -3%
Eggs 19% -6%
Vegetables 21% -6%
Fruit 8% 7%
Beef 18% -1%
Poultry 44% -2%
Non-food prices
Petrol 22% -14%
Electricity 13% 8%
Gas 22% 5%
Housing rents 6% 3%
Wages Dec 2006 to Sep 2008

(7 quarters)

Sep 2008 to Jun 2010

(7 quarters)

Nominal pre-tax wages 7% 7%
Real pre-tax wages 0% 5%
Real after-tax wages -1% 9%

Incredible that food prices went up 15% over the last two years of Labour’s term. Now this is not their fault, but it shows how meaningless their no GST policy on fruit and veges is – the price movements from season to season are far greater than the GST. For example vegetables went up 21% in Labour’s last two years and have dropped 6% since Sep 2008.

And most damning, a NZer on the average wage had a 1% drop in their real after tax wages from Dec 2006 to Sep 2008, while under the most recent seven quarters that worker would be 9% better off. And that is before the 1 October tax changes which will make then even better than 9%.

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The importance of low inflation and tax cuts

October 4th, 2010 at 9:00 am by David Farrar

Just been looking at an old press release from Bill English. It compares the nine years from Sep 90 to Sep 99, the same period from Sep 99 to Sep 08 and the 21 months since then to June 10.

The average weekly earnings went up 27% in the 90s, 37% under Labour and 7% since Sep 00. The average increase per year is 3.0%, 4.1% and 4.0%.

But if you take account of tax paid, to look at what someone on the average earnings/wage gets to take home, then the increases are 33%, 33% and 11% – or annualized it is 3.7%, 3.7% and 6.3%.

Finally thought you want to look at the purchasing power – has someone earning at the average (mean) had their purchasing power increase during each of those periods, and by how much. Now inflation during each period was 16%, 29% and 2% Annualised this is 1.7%, 3.2% and 1.2%. This is worth remembering when Labour talks about cost of living.

So what was the increase in real after tax average earnings. They were 15.5% from Sep 90 to Sep 99, 3.0% from Sep 99 to Sep 08 and since Sep 08 8.7%. On an annualized basis, real wages went up 1.7% a year under National, then only 0.3% a year up until Sep 08, and a massive 5.0% a year since Sep 08.

Average FT Earnings Increase/Year
Gross Net Real Net
Sep 90 – 99 3.0% 3.7% 1.7%
Sep 99 – 08 4.1% 3.7% 0.3%
Sep 08 – Jun 10 4.0% 6.3% 5.0%

This table above shows the difference. I’ll update it after we get the Dec 10 figures which will include the latest tax cuts, but also the GST impact.

The moral of the story is wage growth by itself is not enough. You also need low inflation and tax cuts to offset fiscal drag.

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The importance of tax cuts

August 27th, 2010 at 9:00 am by David Farrar

Bill English’s office has put out a comparison of real (CPI adjusted) net (after tax) wage growth for a full-time worker on the average (mean) wage.

The Australian data only goes back to 1994, so the first time period compared is Sep 1994 to Sep 1999 – the final quarter before Labour took office.

During those five years the real net income for a FT worker on the average wage rose 13.2% in New Zealand and 6.2% in Australia.

Then over the next nine years from September 1999 to September 2008, the increase in New Zealand was 3.0% and in Australia it was 19.3%. Yep six times greater in Australia. They had high wages, low inflation and tax cuts. We had no tax cuts, higher inflation and lower wage increases.

From Since September 2008, to June 2010, the increase in New Zealand has been 8.7% vs 4.8% in Australia.

If one translates this to average annual increases, then the comparison would be:

  • Sep 94 – Sep 99 – 2.6% NZ vs 1.2% Aust
  • Sep 99 – Sep 08 – 0.3% NZ vs 2.1% Aust
  • Sep 08 – Jun 10 – 5.0% NZ vs 2.7% Aust

Now the time periods used are slightly cheery picked, in that the latest period includes both the April 2009 tax cuts and the October 2008 tax cuts – so they do not correspond exactly to Government terms. But on the other hand Labour did the Oct 2008 tax cuts most grudgingly, because of the election, and probably would ave cancelled them if they had retained office.

The stat that stands out to me is that during those nine years from Sep 99 to Sep 08, the average after tax income only grew 0.3% a year. Fiscal drag mean someone on the average wage paid more and more tax as their salary increased.

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