Damien Grant: It hurts me to say it, but inflation is actually falling

Damien Grant is an Auckland business owner who regularly provides op-eds for Stuff, from a libertarian perspective.

OPINION: If you’re behind the wheel of a big car heading for a tree after a long night out, the outcome of the interaction between you and the tree depends on a number of factors.

The type and size of the tree, for sure. Your reaction time, whether you are wearing a seat belt and, most importantly, how fast the car will travel in a crash.

However, one factor that is irrelevant is the number of miles you traveled in the previous hour.

I hope this is clear. If not, I can only assume you work for Statistics New Zealand.

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* Inflation by numbers – how NZ hit an unwanted high in 32 years
* Isn’t the Reserve Bank supposed to keep inflation low? So why don’t they have that?

Last week’s stats NZ announced inflation is 7.3%. A terrible result. There was much wailing in the commentary and again the central bank governor was nowhere to be found.

Only inflation is not running at 7.3%. Inflation is not increasing. Exactly the opposite. Inflation appears to have peaked last September.

It pains me to write this as few things bring me more joy than… detailing the failures of those responsible for lowering our currency. But facts are facts, and when things go right, someone has to point them out.

Prices have risen by 7.3% in the past four quarters. In the year it took this planet to orbit the sun, the price of goods and services sold in our small corner of the world has increased by this amount.

That’s interesting, I think, but not economically relevant. What we would like to know is, how fast are prices rising now?

In the June quarter, prices rose by 1.7%. That’s the data point that counts. In the previous quarter it was 1.8%. Inflation is falling, unlike my blood pressure.

Inflation rose by 2.2, 1.4, 1.8 and 1.7 in the last four quarters. If you add these together, you get 7.3%, with a rounding margin.

The main data point here is last September. At 2.2%, it is an outlier and anchors the annual rate at a high level.

While prices have never risen that fast again, as we kept adding new data to this spike, the annual rate seemed to be rising, when in fact it was falling.

If prices rise by roughly 2% in the next quarter – more than in the last quarter – the media will report that inflation is falling, when it will actually rise, as the 2.2% increase in September last year fell from the added annual data and the new figure of 2%.

That’s a long and winding road to get to the point: inflation appears to have peaked, despite what the media is reporting.

We should have expected this. Quantitative easing stopped in July last year. The Reserve Bank has committed to settle this, effectively forcing the Treasury to pay back the printed money. I doubt this will actually happen and it will take decades but this is off the couch declared intention.

The Monetary Policy Committee has been raising interest rates since October last year. If you believe in monetary orthodoxy, loose monetary policy causes inflation, tight monetary policy reduces it.

It may be generous to describe our current monetary policy as tight, but the recklessness of 2020 and 2021 is over and results should follow.

There is also the possibility that we are in a recession, which is defined as two quarters of negative growth. Economic growth fell 0.2% in the March quarter.

If it contracts in the June quarter, we are formally in a recession, but either way there is a continued decline in economic activity. A decline in economic activity depresses prices.

It is unclear to me why the great Kauri of the Terrace, our Reserve Bank, is not spreading this good news.

Managing inflation expectations is a powerful tool at the bank’s disposal. Maybe the governor and his team can’t see the woods for the tree they think they are.

Still. Looking further under the hood of Stats NZ’s data, we find other useful and positive, bits of information.

We divide inflation into tradable and non-tradable.

Tradable inflation is what we import from abroad. If the Saudis raise the oil price, the local price will go up.

Tradable inflation was 1.9%, compared to the non-tradable sector, which was only 1.4%, down from 1.5 in the previous quarter.

On an annual basis, this means that domestic prices are currently rising at a rate of 5.6% a year and appear relatively stable.

A major driver of inflation is related to housing and transport, sectors that suffer from supply constraints.

Not all price increases are inflation. Sometimes a price will rise because either the supply of the good has fallen or the demand has risen.

One of the challenges faced by consumers, employees and business leaders is trying to decipher whether a change in price is the result of a structural shift in the market for that particular item, or inflation.

Inflation is still too high and no one is held accountable. It is remarkable that we ask quickly the All Blacks coach resigns when he loses a single series, while we are willing to tolerate the repeated failures of Central Bank Governor Adrian Orr and Treasury Secretary Grant Robertson.

Even if the news is positive, the governor is awol. He should be explaining this, not me, a second rate writer who is toiling in almost oblivion.

The governor likes to think that the Reserve Bank is a tree; mr. Mahuta, a giant kauri tree in the Waipoua Forest. A nice analogy.

In recent years, Tana Mahuta has been threatened by the spread of cowrie dieback in the region. Drastic measures were taken to preserve this majestic natural wonder. It is time to consider whether similar measures are needed to preserve our central bank.