Liam Dann: Inflation blame game highlights stupid political bias

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Inflation is high in the UK and New Zealand, with opposition parties in both countries blaming prime ministers. Photos / Mark Mitchell, Getty Images

OPINION:

We currently have high inflation in New Zealand and a lot of people seem to think Prime Minister Jacinda Ardern is to blame for it.

Coincidentally, the UK also has inflation now and a lot of people there seem to think Prime Minister Boris Johnson is to blame.

The UK joined the inflation club this week with news that the Consumer Price Index posted an annual increase of 4.2% in September – the highest pace in more than a decade .

In New Zealand, inflation is now 4.9 percent.

The main difference is that there it is those on the left who blame the government, while here it is those on the right.

Of course, this is not really a coincidence.

There is high inflation everywhere now. It’s bigger than Boris Johnson and it’s definitely out of Jacinda Ardern’s control.

But the contrasting political arguments highlight the myopic and tribal viewpoints that still underpin many economic commentaries.

When an issue is global, it makes no sense to shift the blame onto the political lines of local parties.

It doesn’t stop people.

Inflation creates problems for governments because it hits voters directly in the pocket.

And the average voter pays far more attention to their grocery bill than to international financial news.

So inflation is bad news for Labor here, it is bad news for the Tories there.

This is bad news for US President Joe Biden.

Inflation is probably even bad news for President of the People’s Republic of China Xi Jinping – although oddly enough, no one in China seems to blame him, at least not publicly.

This is particularly bad news for Australian Prime Minister Scott Morrison, even though the annual rate is still only 3.8%.

That’s because Morrison faces a federal election next year.

Scheduled for next May, Australians will head to the polls around the same time most economists see inflation peaking around the world.

Other world leaders have time up their sleeves for pandemic supply issues to ease and central bank policies to take hold.

And in Australia, the central bank seems oddly reluctant to come to Morrison’s rescue and avoid inflation with higher interest rates.

Things are different in New Zealand.

We take inflation more seriously here and expect our central bank to strongly oppose it.

The Reserve Bank (RBNZ) will almost certainly make its second straight rate hike next week, putting it well ahead of the rest of the world in its policy response to high inflation.

RBNZ Governor Adrian Orr has widely criticized the more conservative segment of our financial community for its progressive stance on the Treaty of Waitangi and issues of climate change.

Some critics seek to confuse these issues with monetary policy, implying that the Reserve Bank is more radical in this area than it actually is.

When it comes to the core business of the RBNZ, Orr and his team remain firmly orthodox in their thinking.

Reserve Bank of New Zealand Governor Adrian Orr. Photo / Mike Scott

It’s important to place their actions in a global context, as there are limits to how far a small nation like New Zealand can move away from the US Federal Reserve.

Take a look at what’s going on in Turkey, where the central bank has decided – under heavy political pressure – to cut rates despite high inflation.

The Turkish lira is in free fall and the country is now facing a currency crisis.

So yes, the RBNZ participated in low interest rate policies that have led to the build-up of asset price inflation and now consumer price inflation.

We printed money to pay for our Covid response.

In short, we have followed global trends. We have done what it takes to avoid recession and deflation, but always with more caution than the big countries. We were the last to print money, the first to stop.

We are now the first to start increasing rates.

Those who suffered from the inflationary era of the 1970s and 1980s tend to worry a lot about the integration of inflation into the economy.

There is a risk of succumbing to nostalgic panic, the kind of cultural blindness that makes old people like me think pop music is no longer good.

I don’t think the current levels of inflation are going to last. Although that doesn’t mean I think they aren’t a problem.

The annoying thing is seeing it all become another polarized and politically tribal debate.

Those contemplating inflation are said to fall into one of two camps – structural or transitional.

This is a silly division because, as with everything in the real world, more than two things can be true.

Inflation is always transitory. Economies do not stand still.

The inflation of the 1970s was transient, it only took 15 years to pass.

It did a lot more damage than needed because it was not treated properly for several years.

Meanwhile, just six months of very high inflation tied entirely to transient events – like pandemic supply chain issues – could still be enough to trigger the next global financial crisis.

The complications of Covid were the trigger for inflation after years of accommodative monetary policy failed to revive it.

The congestion in ports around the world and the delay in production in factories is clearly an exceptional phenomenon.

Whether sooner or later, its resolution will be a powerful deflationary force.

New Zealand, as always, needs to maintain a balanced stance and prepare for shocks in either direction.

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