Is Chris Hipkins the man to save us from inflation? Here are six steps he can take

ANALYSIS: Stats NZ will reveal on Wednesday morning whether inflation is continuing to edge down from its June-quarter high of 7.3% or has resumed rising from its last reported level of 7.2%.

Bank economists expect the rate to come in somewhere between 6.9% and 7.2%, but the Reserve Bank has been braced for inflation to instead increase to 7.5%.

Incoming prime minister Chris Hipkins has promised to increase the Government’s focus on tackling the “cost of living”, so what are his options?

READ MORE:
* Chris Hipkins reorients Labour towards fighting ‘pandemic of inflation’
* Whatever happens with inflation, the Reserve Bank will have got it ‘right’
* Isn’t the Reserve Bank supposed to keep inflation down? So why haven’t they?

Lean harder on the Reserve Bank

It is supposed to be the Reserve Bank’s job to keep inflation under 3% and the central bank is supposed to be independent of the Government.

But the Government can direct the central bank at a high level by changing its mandate, and could try to lean on it to tighten monetary policy and raise interest rates though its public comments on economic policy.

The National Party, for example, has committed to simplify the Reserve Bank’s mandate by returning its sole focus to controlling inflation, and dropping the requirement that it also acts to support maximum sustainable employment.

But as the Reserve Bank turned hawkish in November when it raised the official cash rate to 4.25% and signalled further steep rises in interest rates, it is unclear how much more encouragement the bank needs to go hard on inflation right now.

BNZ research head Stephen Toplis says “we shouldn’t kid ourselves that everything about this inflationary environment is fixable by somebody”.

“There is a bit too much of that going on, with a mentality from some that the Reserve Bank should keep hiking interest rates until it kills us all.

“In the last few weeks some of the biggest sources of inflationary pressure have been the weather and domestic petrol prices going on their way back up.”

Neither the Government nor the Reserve Bank can control that at least, he notes.

Cut government spending

Or just not increase it as fast.

Toplis says the best role the Government can play in minimising inflationary pressures in the economy is simply to make sure it doesn’t add to them.

Inflation is caused by too much money chasing too few goods, so if the Government borrowed and spent less, that should help bring inflation down.

Hipkins and Finance Minister Grant Robertson have both signalled the Government will run a ruler over its costs and ditch any new policy initiatives that can’t be justified in the current economic environment.

So that is certain to be part of their policy response to the rising cost of living.

Curbing government spending has most impact when it is reducing spending on goods and services that are in high demand at the time, which might include cutting infrastructure spending during a building boom, for example.

It has less impact if its spending isn’t actually contributing to excess demand.

Attempting to limit pay rises in the public sector could also put downward pressure on inflation, especially if it encourages workers in the private sector to reduce their pay expectations and settle for less – but may not leave people better off overall.

Raise taxes

Increasing taxes and paying back government debt can help suck demand out of the economy, reduce spending and bring prices down.

But again the snag is that it is unlikely to leave people feeling any better off, at least in the short term.

There is no sign the Government is considering higher taxes as a way to control inflation.

“The only way you can meaningfully reduce demand with taxes is to tax the average consumer,” Toplis says.

“You raise taxes to dampen domestic demand but that is taking money out of the pockets of people who can’t afford things.”

Toplis says raising taxes on the better-off doesn’t have much of an effect.

“That tends to reduce savings, not spending, as the affluent just reduce the amount that they save.”

Subsidise the hardest-hit

The main public policy response to rising inflation last year was the $350 Cost of Living Payment.

It was designed to help working people meet the rising cost of living, but will in itself have been inflationary given that the cash hand-outs were intended to be spent.

The Government seems unlikely to repeat the exercise given the embarrassment that occurred when it transpired that tens of thousands of people, including people who had migrated away from New Zealand, received the payments.

The payments may be best seen as having been redistributive in nature; helping those who received them deal with inflation, at the expense of those who did not.

Toughen up competition policy

There is strong evidence that inflation is (or at least was) being driven in part by higher profits that have been reflected in a steep increase in the corporate tax take.

Much of the deeper thinking within the Government about how to respond to the challenges posed by the rising cost of living have centred on competition and regulatory reforms.

Competition advocate Tex Edwards says “’greed-flation’ is a global phenomenon right now” and competition law is a ‘top five’ item on the political agenda”.

Commerce Minister David Clark last year agreed to grant the Commerce Commission more powers to take on big businesses over practices that are having an anticompetitive effect.

Ministers have also gone further than the commission in implementing and considering reforms to the supermarket industry, and arguably the fuel industry, after market studies of those industries.

The moot point may be whether the competition watchdog is up to the job.

Improve productivity

Raising productivity is often viewed as the best way to combat inflation in the long term.

“Anything you can do to enhance productivity will be helpful,” Toplis says.

All that is missing to do that is the magic wand.