The trouble with this bout of inflation
With the cost of petrol, food and just about everything else on the rise, economists are focusing on inflation. Inflation was under 2% annually for nearly all of the past 10 years.
Last year, it averaged almost 4%.
This is happening in other countries, too.
Across the OECD, average inflation was almost 6% and energy prices grew by almost 30%.
A lot of this inflation is simply the increased costs of doing things.
Because of the pandemic, it is taking longer to bring in materials from overseas and to get products to markets. There is more time spent on planning and logistics, and more money tied up in parts and unsold goods.
New and changing pandemic requirements plus extra staff management increase costs even further.
Inflation partly reflects these added costs.
Because the inflation is real and international, the Reserve Bank has to think carefully about what it does. Usually, the bank just raises interest rates when inflation arrives.
The aim is to reduce economic activity across the board.
At the moment, it isn’t the economy as a whole that’s booming.
Hospitality, tourism and education are screaming for help, but agriculture is benefiting from high overseas prices.
Construction looks stuck between higher demand and shortages of materials.
What can we do?
That depends on how long this inflation is expected to continue.
Some data from the United States, nearly one-quarter of the world’s economy, suggests that people don’t think it will continue.
When people expect higher inflation, that can cement it into place.
A New Zealand economist made the point that labour costs are up, but we don’t yet know what that means.
It could be a bit of catching up or instead something more permanent.
For businesses, it’s a good time to review costs and suppliers.
When prices don’t change much, it’s easy just to roll over contracts.
With prices changing, it’s worth looking at costs a bit more closely.
It’s also an opportunity to review pricing.
A combination of higher incomes and inflation gives businesses a bit of flexibility to raise prices if necessary.
For employees, it’s a similar situation.
This could be a chance to take stock of all the ways you contribute at work and ask for that raise or promotion.
But for all of us, higher prices mean watching how we spend our money, even if we have a bit more of it. One more consequence of Covid, unfortunately.