Friday, 22 April 2022


I had a few chats about yesterday's 6.9% inflation result. 

Justin Giovanetti from The Spinoff:

Eric Crampton, chief economist at the New Zealand Initiative, says our Reserve Bank has some explaining to do. The bank is responsible for the national economy and, according to Crampton, it owns some of the current situation. When the economy looked like it was going to crash into a deep depression in the first months of Covid-19, the Reserve Bank dusted off its playbook from the global financial crisis and pumped billions into the economy. Within months, it became clear that the economy wasn’t going to crash after all. “This was not the time you want to run the GFC playbook again,” said Crampton.

The bank kept interest rates low for most of the next two years, watching as the housing market soared and unemployment tumbled to a historic low. While that was great for homeowners and workers, it set the dominoes now tumbling in today’s inflation surge.

“It’s going to take a fair bit to get inflation under control. For a long time, New Zealand had one of the most credible inflation targeting regimes in the world. We pioneered it,” said Crampton. Now, he’s not so sure.

“There’s nothing the bank can do about the war in Ukraine or global fuel shocks. The bank should look through that. But because the bank under the current governor has cared about everything under the sun except inflation, it will take time to create credibility that it cares about inflation. The last annual report mentioned climate change more often than inflation.”

Susan Edmunds at Stuff 

NZ Initiative chief economist Eric Crampton said the Government should look at any area that was under substantial supply pressure.

“This would not reduce inflation, but it would reduce cost pressures in areas where there is substantial pressure. How many construction projects that were initiated as part of the shovel-ready projects thing in 2020 never got an adequate cost-benefit analysis – because the point was avoiding a pile of unemployed construction workers – but are still ongoing now, drawing scarce workers and materials into projects that make far less sense than ones that they could otherwise be employed in?”

Direct the Reserve Bank to tackle inflation only

Since 2018, the Reserve Bank has had a dual mandate, to consider both employment and inflation when setting the official cash rate.

Crampton said that could be changed back to a single mandate to focus on inflation.

“Inflation will be worse and fighting inflation will be harder where the Reserve Bank has lost some of its credibility. Moving sharply to restore that credibility will reduce inflation expectations, make it less likely that current high inflation beds in, and make it less costly for the country to get back to normal inflation.”

Address ‘red tape’

The need to keep up with regulations is often blamed for higher prices.

Crampton said the Government could look at regulatory structures that made things hard when supply chains were under pressure.

”Again, this does not reduce inflation, but could reduce overall price levels in those areas. Simplest and most obvious example: building materials. Councils facing joint and several liability are highly reluctant to sign off on any material that they’re not familiar with. That means that if the materials they are familiar with start being scarce, it’s darned hard to shift around. We could take councils out of joint and several liability, so they wouldn’t be so nervous about sign-offs.

“We are going to get hammered yet by the supply shocks coming out of Ukraine and Shanghai. Resilience against global upheaval requires flexibility so that if things go pear-shaped in one spot, we can draw in comparable supply from elsewhere.”


Crampton said easing the regulatory barriers that stopped some migrants already here from working would also help.

“How many doctors could start working in our health system if the ridiculous barriers to their working here were eased?”


But Crampton said the Government should consider inflation-adjusting the tax brackets.

Because the marginal tax rates apply from set income levels, more people move into higher tax brackets as incomes rise, even if inflation means they are not actually better off. The rates have not been moved since 2010 and now even people earning minimum wage are approaching the middle tax bands.

“It’s dumb to consider this a tax cut. It’s preventing a tax increase by stealth. If the Government wants more money, it should have to go to Parliament for supply rather than just let inflation eventually push everyone into the 33% or 39% tax brackets.

Bridie Witton at Stuff: 

The winner of this contest over who is to blame could end up on the Treasury benches, but Dr Eric Crampton, chief economist at The New Zealand Initiative, thinks both major parties are boxing at shadows.

“The high cost of living in New Zealand has always been a problem, especially around housing,” Crampton said.

“That is not an inflation problem, that is a broken housing market problem and the failure to build enough houses for 20 years.”


Crampton said inflation is a global phenomenon, as Reserve Banks around the world have been overly-stimulatory. But no party was ascribing blame in the right direction.

“So far both the Government and the opposition have pointed to all kinds of things other than the Reserve Bank being the ultimate source of inflation,” he said.

“On the Labour side they’ve been pointing to the supermarkets and construction, where they have wanted to do things anyway, as being the problem.

“On the National side, they have pointed to Government spending ... as being the problem.”

But it was Reserve Bank policy which was the problem, he said.

“They have gotten some of their forecasts and policies wrong,” he said. “Everyone had expected very high unemployment outcomes in early 2020 and the Reserve Bank really didn’t update that as quickly as they should have when it became apparently unemployment would not be going through the roof.”

He said he didn’t foresee an outward migration driven by inflation because “inflation is high everywhere”, while the high cost of living, especially around housing, has long been an issue.

“There might be more cause to look to some of the underlying issues which need to be addressed anyway. There are lots of things the Government could be doing to ease price pressures, many of those do not address inflation though.”

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