This Government has an inflation problem too

Little left over to eat, shop or play: high inflation often proves fatal for Governments because higher prices affect everyone, eating away at consumer confidence. Photo: Lynn Grieveson / The Kākā

TL;DR: It seems obvious to say now, but the last two years in Aotearoa-New Zealand’s political economy has shown that nominal inflation is much more of a killer of Governments than higher unemployment or unaffordable housing, even if real inflation isn’t nearly as high.

The close connections between inflation spikes and slumps in consumer confidence and confidence in the Government of the day are clear in the charts below. The political lesson is to target low nominal inflation over everything else, including jobs growth, GDP growth, cheaper houses and real wages and output growth per hour worked.

The potential problem for the new Government is that inflation and interest rates aren’t likely to fall as fast as it expects in the next year to 18 months.

That’s partly because of overseas factors, and partly because the National-ACT-NZ First coalition Government itself plans to accidentally and deliberately accelerate inflation via hikes in central and local Government fees and charges. See more below.

Elsewhere in the news in Aotearoa-NZ’s political economy and beyond at 6 am:

• Waka Kotahi-NZTA has warned Transport Minister Simeon Brown in a briefing that it will need to spend about twice as much as it expects to receive in revenue over the next decade. NZ Herald-$$$ Jenee Tibshraeny.

• Key US market interest rates rose around 20 basis points on Friday night after US jobs growth in January was almost double market expectations. That is expected to flow through into higher rates here today and take some of the pressure building on banks over recent weeks to cut fixed mortgage rates.

• The NZ dollar fell to a fresh 2024 low of 60.60 USc on Friday night because those higher US market interest rates made the US dollar relatively more attractive.

Full paying subscribers can read and hear more detail in my Dawn Chorus podcast above and below the paywall fold. Join our community of paying subscribers to get access to ‘Hoon’ webinars, our private chat system and be able to comment on articles. Paying subscribers also support the public interest journalism we do at The Kākā on housing affordability, climate emissions and poverty.

This Government has an inflation problem too