Fact-checking claims about inflation

Inflation is becoming a political football, with the Government and opposition making conflicting claims as to the drivers of the soaring cost of living and the solutions.

So who’s on the money? And who’s off the mark? Cushla Norman went to an economics 101 class by senior lecturer Robert Kirkby at Victoria University of Wellington to find out more.

This year the Government is spending an extra $6 billion in the Budget. Robert Kirkby tells the class that Government spending is inflationary, but the question is to what degree.

“It's probably not the main driver, it's probably an important smaller driver,” said Kirkby.

He estimates it contributes to about a quarter of the 7.3% inflation rate.

But he also points out that extra Government spending results in higher GDP and higher employment.

“Everyone likes to point to this one cause that’s causing inflation but really there are a variety of causes and this is one of them but it’s not going to be one of the biggest ones,” said Kirkby.

Robert Kirkby said the Reserve Bank's estimate for how much global forces are contributing to inflation is about two percentage points of the 7.3%.

The global forces “are definitely there”, he said. Russia’s invasion of Ukraine has pushed up oil and wheat prices, and New Zealand can’t control global oil prices.

The supply chain problems are “definitely real”, said Kirkby.

But he notes that somewhat counter-intuitively New Zealand is actually exporting and importing more than ever before.

“The problem is we want to buy way more than we used to than before the pandemic.”

He suggests the supply chain problem may not be as easy to fix as first thought.

Robert Kirkby said we are seeing a lot of inflation that is purely domestic, like rents.

“Rents have nothing to do with global issues, right, that’s clearly a housing thing that’s domestic.”

He said the opposition is right about businesses having trouble hiring but that’s not leading to massively higher wages or higher prices.

“The idea is if we let in a lot more immigrants, we’d be able to stop the wages increasing and stop the inflation, but that doesn’t appear to be what’s driving the inflation, because the wage increases are much smaller than the price ones.”

Yes. “Inflation is occurring in the things that are domestic and the things that are international, but it’s not one or the other, it’s very much both of them going on at once,” said Kirkby.

New Zealand’s inflation rate hit a 32-year height this week, reaching 7.3%. The UK’s inflation rate is at a 40-year high of 9.4%, in the US, it’s 9.1%, Germany’s is 8.2% and in Australia, it’s 5.2%.

But Kirkby points out that while high inflation is happening in most countries, it’s not something every country is experiencing, with low rates of inflation in China, Switzerland and Japan.

Robert Kirkby said he’s more right about the second half of that sentence – inflation does cause pain, especially for people on low incomes.

But does it kill economies? Kirkby said right now it’s not so obvious.

“GDP is still high and employment is still high, so we think it’s doing some damage to the economy but it’s not obvious how much it’s doing yet, if it keeps going higher it will start doing substantial amounts.”

Robert Kirkby said it’s the Reserve Bank who’s to blame because it’s their job to control inflation and it does this through the official cash rate. The Reserve Bank has a responsibility to keep inflation between 1 and 3%.

“General tax cuts are going to put more money in your pocket and my pocket and it's likely we'll spend some of that so again that's going to be inflationary,” said Kirkby.

He’s right on a technicality, said, Kirkby. It helps ease the pain for people at the pump but tax cuts, whether they are on income or fuel are still inflationary. He said the three ways to reduce inflation are to cut spending, raise taxes and increase interest rates.