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  • rmacculloch

Blaming our Inflation on the Rest of the World may seriously backfire on the PM and Finance Minister

Inflation is running rampant in NZ. "I expect that it will be rising as it is right around the world", says the Finance Minister today. He's wrong to make that assumption.

Why should we expect inflation to be rising here like it is in other countries? Since we were meant to be exceptional. We were the country that was the first in the whole world to implement explicit inflation targets. We were the first to have a "Policy Targets Agreement", signed off by the Finance Minister and Reserve Bank Governor. It stipulates that inflation should be kept at between 1 and 3 percent over the medium term.

Yet inflation is looking like hitting about 7% shortly in NZ, maybe higher, when the latest figures are released this week. Core inflation is rising above the 1 to 3% target. The RBNZ admits this is not a temporary shock, “with a broad range of indicators highlighting domestic capacity constraints and ongoing inflation pressures”. The Policy Targets Agreement has been breached. That agreement has underpinned NZ's economic security since 1989.

Yet the PM, Finance Minister, Attorney General and the RBNZ keep trying to shift the blame by saying the situation overseas is the same as in NZ. The Summary Record of the Monetary Policy Committee's latest meeting on 13 April, 2022, for example, “noted that global consumer price inflation is high, well above most central banks’ targets”.

Shame on them for playing our media and the public for fools and preying on peoples' non-expert knowledge of monetary policy.

Let's set the record straight: although the US Federal Reserve also operates under a mandate of “stable prices”, these words are not defined by an inflation target subject to an agreement between the US Treasury Secretary & Fed Chair. For most of its history, the Fed baulked at providing even its own internal definition. Although a target did emerge when Ben Bernanke was Chair, the Fed subsequently changed it into one that was intentionally vague and ambiguous.

By contrast, our RBNZ has no such discretion to play around with the meaning of price stability. The whole point of the explicit inflation target in the Policy Targets Agreement is to “provide a clear agreement between policy makers, thereby limiting the scope for discretionary policy actions”. Who’s the quote from? A bloke called Adrian Orr writing for OECD Policy Studies in 1994.

Not one overseas Central Bank is operating under the same legal structures, the same RBNZ Act, nor the same Policy Targets Agreement, as ours. The US Federal Reserve and the US Treasury Secretary have not broken ANY agreement on inflation which they signed up to. Our Finance Minister and our RBNZ have just driven a truck through one.



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