Mike's Minute: Inflation is here, and it's looking ugly

Author
Mike Hosking,
Publish Date
Tue, 27 Jul 2021, 9:33AM

Mike's Minute: Inflation is here, and it's looking ugly

Author
Mike Hosking,
Publish Date
Tue, 27 Jul 2021, 9:33AM

The Herald have very kindly done the numbers for us. Inflation is not only here, but it's ugly.

For the average family in Auckland, it's $100 a week. Over $5000 a year in inflation. You are getting nothing for it, it's just the cost of everything has gone up.

The figure varies depending on who you are, how many in your family, where you are, and what your circumstances are. But inflation is everywhere, and it affects every one of us.

This is bad news.

Some of it, as the banks point out, is temporary. Well, we hope it is. Things like the shipping and supply issues. But some of it has been foisted upon us by the Government

The myriad of new costs and taxes are directly contributing to inflation.

The economic tragedy of all of this is it's entirely predictable. When you put the minimum wage up, yes that person get a pay rise and yes, they most likely spend it.

That’s Grant Robertson's argument.

But then, and this is where it gets ugly for Robertson, the cost of the stuff that is made at the workplace of the person who got the pay rise, gets put up so we all pay more for it.

And in paying more for that, we have less to pay for other things.

The fatal flaw is that the input, like the pay rise, didn’t come from a greater output, like a new product or more sales. It came from the stroke of a pen in Wellington.

There are also the intangibles that will come into play. Things like confidence. When interest rates go up and mortgages get more expensive, people not only don’t have as much to buy things, they also get worried when they don't have as much spending power as they did before. They then worry it will get worse so shut their wallets, just in case. It’s a self-fulfilling prophecy.

It hits business as well. When they see fewer people and less spending, the expansionary thoughts stop with it and if it turns for the worse, jobs get lost. I know this because it's simple economics and it's happened before. None of it is rocket science.

The Government will see it in housing as well, much to their chagrin and perhaps surprise. Materials are hard to come by, and when they are, they cost more.

So, less building gets done in an economy when we need more building. It’s a vicious cycle and we are entering it as we speak.

As Richard Prebble so eloquently pointed out a week or so back in his Herald column, people hate inflation, and they feel robbed.

Inflation turns the tide on mood not just economically, but politically. The Government in the next year are about to find out not just the economic consequences of not understanding economics, but the political price they will be paying as well.