Are we living with higher inflation now?

Introduction:

The Reserve Bank has recently made projections stating that inflation will remain above 3% for another year. This raises questions about changing our inflation expectations and possibly even our targets. In this article, we’ll explore the possibility of living with higher inflation and the potential impacts it could have.

The Current Situation:

Current global inflation figures indicate we may not yet be out of the woods. In Europe, annual inflation sits at 8.5%, while the US has seen a monthly increase of 0.5%, the highest rise since June. In New Zealand, inflation has been above the target band for 20 months, and the Reserve Bank projects that it won’t drop below 3% until September 2022.

The Risks:

Waikato University honorary professor Leo Krippner accurately predicted looming inflationary pressures and is concerned that current interest rate rises may not be enough to reduce demand. If inflation remains high, politicians may question whether it’s worth the economic pain to continue pursuing the 1% to 3% inflation target. ANZ chief economist Sharon Zollner agrees and suggests that some countries may decide to change their inflation targets.

The Possible Impacts:

If major economies do decide to live with higher inflation, it could make it more challenging for New Zealand to meet the 3% inflation target. New Zealand’s model has been that domestic inflation runs at 3%, and tradeable inflation caused by inflation overseas runs at 1%, giving us a consumer price index of 2%. If tradeable inflation is running at 4% or 5%, it may not be feasible to meet the current target.

Related Facts:

– Inflation in Europe is at its highest rate since 2012.
– The US is experiencing a shortage of goods, which has driven prices up, contributing to inflation.
– The Reserve Bank of Australia has increased its inflation target from tfrom2% to 3%.

Key Takeaway:

The possibility of sustained higher inflation may change our expectations and targets. If major economies decide to live with higher inflation, it could make it challenging to meet the current inflation target in New Zealand. It’s a debate that is likely to become louder in the coming year, and it’s one that we should keep a close eye on.

Conclusion:

In conclusion, it’s essential to consider the possibility that higher inflation may become the norm. As a result, the current target may need to be revised to reflect the new economic reality, and we may need to prepare for a period of potentially painful adjustment. It’s a complex issue with many variables, but it’s one that we need to address if we are to move forward toward a stable and sustainable economy.