There are a larger and larger number of analysts and journalists complaining about inflation at present. The view seems to be that since the price of some goods are increase (fuel and food primarily) there is an inflation problem, and “something must be done”. Because people have heard the RBNZ mention inflation they figure that the Bank should do something.
But I’ll tell you right now, as one of the most hawkish people I know I still do not see an inflation problem. Yes, GST has pushed up the price level. Yes, food and fuel prices have spiked – and they are hurting peoples real incomes! But none of this is inflation.
What is inflation? Inflation is the trend rate of growth in the price level. In less wonkish terms, inflation of x% is when the price of all goods and services rise consistently by x% excluding any changes in “relative prices”.
The increase in GST was one-off, so its not inflation. The increase in petrol and food is a relative price increase because petrol and food are relatively more scarce. Does the increase hurt the economy and the people in it – hell yes. Does it lower our real incomes and welfare – yes. Can we do anything about it – no.
Unless the Reserve Bank can discover a large oil deposit and process it for our use they can do nothing about this.
So what we have at present IS NOT an inflation problem. What we have is a negative economic shock, where we are being forced to reduce our standards of living because the resources we use are more scarce. Having the price represent this scarcity means that we will take that into account, try to substitute away from the good, and hopefully come up with technologies that reduce our reliance on it. But there is nothing the Bank can do about this.