By Bernard Hickey
Let's debate 'good' deflation.
On the face of it, there's everything to love to about deflation and nothing to hate.
From a consumer point of view, falling prices seem unequivocally good, particularly if the shopper is a worker and a homeowner and their wages and house prices are rising at the same time.
It means that any income growth is more powerful and the wealth in their homes can be leveraged up for even more consumption or investment because consumer price deflation is usually combined with falling interest rates.
It seems like the best of all worlds and that's exactly how a lot of Aucklanders are feeling right now. An extra 70,300 jobs have been created in the region in the last two years, meaning 782,200 were working in the December quarter or 66% of the working age population. Median household after-tax income rose 3.6% over the last two years to NZ$1,537 a week.
Auckland's median house price rose by NZ$140,000 over those two years to NZ$675,000, meaning the equity gains for the median household were around NZ$1,346 per week, or rose almost as much per week as total take-home pay.
Meanwhile, prices for a lot of the things homeowners with fresh equity can buy have also fallen. The price of 'tradeable' goods and services, which means imported items and those where the prices are set on international markets, fell 2.3% over the last two years to levels seen back in mid 2010. That means cheaper clothes, shoes, overseas holidays, cars, double cab utes and imported food.
So far so good. But the picture isn't quite as bright for those on below median wages who got below median wage growth and who don't own a home. Their costs are rising much faster than their wages. The weekly rent on a three bedroom house in Auckland rose 13.5% to NZ$602/week in the last two years, more than triple the rate of wage growth. So deflation is good for some workers and consumers, depending on who they are and what they spend their money on.
Deflation is also no fun at all for businesses and Governments. Employers are still having to increase wages of competition in the job market and falling unemployment, but they're often have to cut their prices if they are competing with cheaper imports. Deflation usually squeezes profit margins if companies can't find even cheaper ways to do things, which might mean cutting staff or switching to cheaper imported costs.
Governments struggle to grow their tax revenues when prices stop rising, particularly for GST and corporate taxes. Finance Minister Bill English has warned repeatedly that low inflation is making it increasingly difficult for the Government to reach its surplus target this year. Prices actually fell 0.2% in the December quarter and the Reserve Bank is forecasting annual inflation in the March quarter of 0.0%.
This is where the deflation debate starts to get controversial. The Reserve Bank Governor, Graeme Wheeler, has agreed with Mr English in his Policy Targets Agreement to target inflation of around 2% and within a range of 1-3%. Annual inflation has been below 2% for almost four years and will have been at or below 1% for a year and a half by March next year, according to the Reserve Bank's own forecasts.
Mr Wheeler himself has said he is 'looking through' the 0.9% cut in the annual inflation rate because of the slump in the oil price last year and he remains confident inflation is heading back towards 2%, even though his own forecasts only show it rising as high as 1.7% by March 2017.
Prime Minister John Key has said he will 'cut the Reserve Bank some slack' on the current target and referred to the bank's efforts to hit 2% as like a super-tanker that takes some time to turn. Mr English also seems relatively relaxed about the apparent breach of the target if not the deflation itself, saying New Zealand had a 'good type' of deflation.
Unlike Japan and Europe where slow to no GDP growth and high unemployment dragged on prices and wages, New Zealand had strong GDP growth and low inflation caused by a high currency and falling oil prices, he has said.
"I don't think we've got to worry," the minister who signed the PTA said in a recent speech in Auckland when asked about the risks of deflation. "It's not a negative for us to have low inflation," he said.
This does beg the question though: has the current agreement with the Reserve Bank become asymmetrical? Do Mr Wheeler and Mr English care a lot more about inflation over 3% than inflation under 1%? Can some deflation be ''good" deflation vs 'bad' deflation, and how are we to know the difference?
So far the Reserve Bank and the Government have taken the 'good' deflation route to explain and justify the current deflation, or simply deny it will last very long. This fuzzy decision making within the PTA is having real world consequences. The New Zealand dollar is much higher than it would be if the Reserve Bank cut interest rates in response to deflation, as almost all other central banks in the developed world have done so far this year.
The end result of running a high Official Cash Rate in defiance of deflation is the continued stagnation of the exporting part of the economy, which directly conflicts with one of the Government's major targets -- to lift the export share of GDP to 40% by 2025. That share fell to 28.7% last year from 32.7% in 2008. It's why regional New Zealand has struggled over the last seven years relative to Auckland and Christchurch, which are much more focused on the domestic services industries such as real estate, construction and retailing.
Deciding to turn a blind eye to deflation may actually turn out to be the right thing to do. The Bank For International Settlements, which is the central bankers' bank, argued this month that deflation doesn't necessarily signal an underlying weakness in economic demand. It could be a sign of a 'supply shock' whereby a new technology or resource discovery is producing a lot more supply, thus driving down prices. Cutting interest rates and printing money to solve a shortage of demand that did not exist would be like flogging a dead horse, or more likely, blowing hot air into an asset price bubble that could eventually burst.
So running a lopsided monetary policy that treats deflation differently from high inflation may avoid blowing up a bubble. But that's not a debate we're having. The Reserve Bank is simply denying deflation is more than a passing phase and the Government is turning a blind eye to the breach.
If we had a real debate it may mean we actually changed the PTA to widen or lower the target, or talk about the possibility of 'good' deflation caused by supply shocks. We should have that debate because deflation, high interest rates and an over-valued currency have real consequences for renters, beneficiaries, exporters, the Government's revenues and the regions.
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A version of this article was also published in the Herald on Sunday. It is here with permission.
47 Comments
Bernard, I don't know if we are going to see deflation or just a, 'major market correction',as our economy begins to reflect more the true state of our economy and our individual productivity.
I mean, if you ' build your house on sand', you get whats coming to you.
Just because the USA,Japan and the UK got away with it, ( so far) doesn't mean we will.
We have a lot of foriegn debt, we are very dependent on a handfull of agricultural commodities, in a land with a cost structure that's too high for agricultural commodity production.
Most of our wealth has been built on unrepayable private sector debt, invested in Housing and farming bubbles. We have already sold most of the silver.
China is going to give our economy a huge shock as one the worlds biggest ever Ponzi schemes, bites the dust.
China a country who's money supply has increased 20x in the last 18 years. When it blows we are going to get covered in the proverbial.
As an example look at our exports to China and tell me what industry is going to fill the hole left by collapsing dairy exports? Where's our alternative market?
feb ’15 Chinese milk powder imports followed the same general trend as total dairy import volumes, declining on both a YOY and MOM basis. Feb ’15 whole milk powder (WMP) imports finished down 49.3% YOY and 32.0% MOM on a daily average basis while skim milk powder (SMP) imports finished down 35.2% YOY and 17.9% MOM on a daily average basis. WMP and SMP import volumes remained below three year average volumes, finishing 22.6% and 13.4% lower, respectively.
Just how exposed are we to China?
In late 2013 and early 2014, when Chinese milk powder imports were at their peak, New Zealand ramped up production of WMP, leaving room for the U.S. and others to send skim milk powder (SMP) to China. But now that China is using its stockpiles and importing less, New Zealand can supply nearly all of China’s milk powder needs. In the first two months of this year, China imported 89.8 million pounds of SMP and 310.3 million pounds of WMP, about half as much as in January and February of last year. New Zealand provided 83% of China’s SMP imports and 99% of its WMP. Milk powder makers in the U.S. and Europe will have to find other markets.
Our dollar is way to high and our interest rates far to low, for a country with our risk profile and debt to income ratios.
If we slip into a situation like the Brazil, will we get their %12 interest rate?
“High debt levels, whether in the public or private sector, have historically placed a drag on growth and raised the risk of financial crises that spark deep economic recessions.”
The world has been on a debt binge, increasing total global debt more in the last seven years following the financial crisis than in the remarkable global boom of the previous seven years (2000-2007)! This explosion of debt has occurred in all 22 “advanced” economies, often increasing the debt level by more than 50% of GDP. Consumer debt has increased in all but four countries: the US, the UK, Spain, and Ireland (what these four have in common: housing bubbles). Alarmingly, China’s debt has quadrupled since 2007. The recent report from the McKinsey Institute, cited above, says that six countries have reached levels of unsustainable debt that will require nonconventional methods to reduce it (methods otherwise known as defaulting, monetization; whatever you want to call those measures, they amount to real pain for the debtors, who are in many cases those least able to bear that pain). It’s not just Greece anymore. Quoting from the report: Seven years after the bursting of a global credit bubble resulted in the worst financial crisis since the Great Depression, debt continues to grow. In fact, rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing
– The McKinsey Institute, “Debt and (not much) deleveraging”
http://d21uq3hx4esec9.cloudfront.net/uploads/pdf/150328_TFTF2.pdf
http://www.rbnz.govt.nz/statistics/key_graphs/current_account/
Bernard, there are two main sources of money, private credit (regulated by the RBNZ adjusting interest rates) and government credit (regulated by the government running a deficit or surplus).
The RBNZ were right to drop interest rates in the last financial crisis in order to avert widespread bankruptcy and house repossession. The government was right to run a nice fat fiscal deficit for the same reasons.
Instead of plotting a steady and predictable course back to the natural rate of interest, the RBNZ has suffered from mission creep in that a crisis response of artificially low interest rates has become a policy. They have unwittingly become supporters and enablers of poor government policy.
Instead of handing the country's economic difficulties back to the politicians to solve by putting interest rates up in a steady and predictable way, the RBNZ are persisting in their current misguided course of stealing from the poor to give to the high earners. I characterise this as taking from poor Nelson pensioners who have small bank deposits and giving to high earning Auckland lawyers with big mortgages.
The solution is for the RBNZ to plot a predictable course back to the nautural interest rate and let the government run a deficit either by spending more or taxing less, or both, as they think fit. The RBNZ should not be enabling weak government.
What would a "natural interest rate" be for NZ in a world where most major developed countries have an OCR of ".5% through to minus .25%" ?
You would be joining the unrealistic aims of bank economists if you think that NZs OCR is somehow going to return to 5 or 6%.
Your examples could also include the Nelson wage earner facing zero wage increases due to deflation, and a declining/flat house value due to tight monetary policy.
Basically what I'm saying is the RBNZ are taking the pressure off the politicians when they should not be. The RBNZ have a concept of what the natural interest rate should be, I think they guess it should be about 4% at the moment. By keeping the interest rate below the natural rate they are transferring interest income from those with bank deposits to those with mortgages. People with smaller amounts of savings lend money to the bank on term deposits, these are the savers who lose out. The people who are high earners benefit most from artificially low interest rates on their high mortgages.
I agree the problem is largely international in origin and that other countries are doing everything in their power to devalue their currencies. My point is that is for the government to deal with by running a deficit not for the RBNZ to do for them.
First step is you have to recognise that OCR isn't a good measure to use.
What is the relationship of OCR to resource input?
Where/what are the genuine value additions to the system?
eg We can sell advertising to tax accounting firms all we like, both essential services, but what does it input or add to the actual economy?
So if we're using interest as an adjustment/indicator for, or in response to, the actual economy growth the OCR clearly doesn't match up. Using such indicators therefore will steer you wrong, especially as it's much easier to introduce more legislation to force more advertising and more tax accounting (etc), as opposed to growing the actual economy (which chances are, you don't even know where that is).
As for "the Nelson wage earner". Which one are we talking about. There are a shite load of wage earners in Nelson and unlike a government wage freeze, not all of them are fungible.
People do seem to confuse wealthy people with high earners. They are two quite separate tribes. High earners are usually high borrowers and big spenders - money comes easily to them and they assume it always will. Weathy people are usually more cautious about borrowing as they have everything to lose if they borrow too much - they tend to think about inter-generational issues and capital allocation issues. They are both essential to a successful and civilised society so whilst I'm all for curbing their excesses it is vital we don't scare them off - both tribes have choices and can leave if they choose to do so.
But most of the spending goes into consumables
"That means cheaper clothes, shoes, overseas holidays, cars, double cab utes and imported food."
Or into long term unproductive fixed assets eg houses, rental homes, commercial property, bonds, shares
So where does the funding from the government spending come from?
Those consumables result in very tight Velocity of Money (lossage of 30% for wage earners) where for Keynesian style spending&collect, you need to stimulate economic growth... and you won't achieve that with the tight VoM - in fact, the only real effect is that high end earners will get bigger wages that they don't need, and growth will be limited to them, they'll put much of it into "investment" but the only spending is theirs or the governments. So government types will do well, as will cronies working on their projects....just like Greece. The whole private sector (made up of the mass public) which support the system, and are the ones repaying the government spending, won't increase economically at all... which means when you "tax back" to pay for the spending - you're actually decreasing the majority of the real economy !!!!!!!!!!!!!!!!!!
Yes, I agree with you there. Firstly, my main point was the RBNZ should keep the OCR at whatever their best guess as to the natural rate is unless there is a short term crisis. Rodney Dickens has written a lot about this from his point of view.
Secondly, all the rest of the economic issues are for the government of the day to sort out as best they can.
Thirdly, the point you make is absolutely central to the core of the economic issues we face. I purposely missed bringing the subject up so as not to make things too complicated. These are what I call capital allocation issues. Basically, the monetary issues and the fiscal issues are the short term and easy stuff but capital allocation is what makes a country wealthy or poor. In order to solve this riddle I think you need to figure out which groups in society are better capital allocators and then you can channel society's savings their way. The fundamental flaw in the traditional Marxist thinking is that highly skilled bureaucrats will do this best. The flawed thinking that National espouse is that high earners will.
My thinking is that bureaucrats are usually mediocre capital allocators, whether they work for central government or large corporate entities. There are not awful or brilliant, just ok. I include directors of listed companies in this group as they are essentially bureaucrats unless they own more than 10% of the company.
High earners are usually terrible capital allocators, money comes too easily to them and they do not have the intellectual or emotional framework to be good investors, because they are highly competent in their own field does not make them good at everything.
Unfortunately both of these groups are highly infuential and both suffer from delusions of grandeur.
So where do we look for the people who are excellent capital allocators? I think they are the business owners, not the managers, the owners. Capital allocation is what ownership is all about and these are a society's experts. The Mittelstat, the small and medium sized businesses where the business owners make capital decisions are the key to a prosperous society.
So where does the funding from the government spending come from? The government of NZ spends new currency into existence and then taxes back some or all of that spending. It does not have to borrow it first. Thus running a deficit puts new money into the system, which can be inflationary if they overdo it or mistime it.
See what I just said to MortgageBelt.....
...how only high earners and government will profit, and the government spend decreases the real economy everywhere else....
...and YOU want to disable the high earners with preventative taxation on top of that !!! Are you _insane_?
That would leave the only people getting advantage would be high earning government officials, and high earning business owners with high wealth already because you'll be sucking out more than you put in fopr everyone else !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
I don't want to punish/disable PAYE earners. Regardless of their salary band. I want to punish the so called 'to important to scare aware governement tax hand out bluggers' of our country. You know the ones right - those that sit on their wealth and don't re-invest in our country. The ones who avoid tax, yet use all our roads and other public utilities paid for by you and me. There's plenty of them hanging around NZ.
"atural rate of interest, the RBNZ has suffered from mission creep in that a crisis response of artificially low interest rates has become a policy"
The two fundamental mathematical difficulties that the RBNZ are experiencing:
(1) The tool they have isn't effective against the primary source of change. The primary source is _external_ funding ie private equity and private credit from foreign investors - this is a source of money which you don't cover with your "two sources" Roger.
(2) The tool they've been given has (uses) a loopback effect. Push it up and inflation will slow, but so does investment (due to cost effect of Velocity of Money - and once that dollar and opportunity tiome is gone, it is gone forever). So push it up for 6 months suffer 3 years of defaltionary impact as small businesses hit the wall...and the big business soak up (inflate) the customers (who have to use high rate credit for necessities...tying up their money for 3 - 5 years in HP contracts). Flood of small business (non-specialist) labour retrenching, poor wages, lowered spending, prices _rising_ in response to poor revenue.
Push the lever down. More sales, more hiring, deferred work taking off, margins falling as volume of sales increase since volume of sales provides significant revenue to allow price competition, But lower margins means lower money for staff wages. security of income provides on-paper feeling of stability of income so borrowing increases significantly, demand ensues pushing prices up.
Yes, you are right as usual. I guess it comes from the stock of previously created NZD sloshing about offshore. Nelson has always done a steady export business in selling land and buildings to those fresh off the boat, sometimes I think it's the region's biggest earner.
By the way, my reference to the NZ Mittelstatt above would very definitely include farmers who farm the family farm.
Roger W, you are wasting your time trying to convince Comrade Bernard here. I heard him on the radio this weekend; he believes monopolies are the way to go and that fontera just needs more goverment direct action to force OCR cuts and debase the NZD (my words), to cure its "value added" woes - which, by the way, seems to be Winston's view too, common cause here? It's Muldoonism, which seems to be back in fashion.
EP
Yes, Muldoonism indeed. Mind you the whole world seems to have gone blindly down that path what with the current obsession with the Central Control of Interest Rate Policy Planning Committees around the world, as if Central Planning was a wonderful new idea. Making problems go away (temporarily) by making them bigger is the result.
Is it just me or are exports something you do because you have to, not because they are a good idea? The biggest and strongest economy, the US, do very little. Like us they are endowed with bountiful resources and productive farmland and a well educated population. Exports make for a boom and bust economy where you are forever vulnerable to other people's overproduction - it promotes fragility not resilience. Something is misunderstood somewhere or other.
Alas, these thoughts are not original. I've been trying to understand a chap called Warren Mosler and it's a point he makes. His Soft Currency Economics is very thought provoking and turns everything I thought I knew on it's head. Much like Steve Keen's work did when I first read it.
But inflation eventualy kills producers, especially in an export orientated country like ours. Costs start to excede incomes and more inflation is not an option unless you want production and assets to tank. Inflating costs above those of your trading partners, gets you right to where we are today, uncompetitive and swamped by costs of every kind.
Deflation is just natures way of adjusting costs so we become competitive again, I wouldn't fight nature, it has a habit of winning one way or the other, and the other ain't so nice. ( loss of confidence and a currency crisis)
salaries go up, so debt servicing capabililty go up. so debt goes up. Debt burden doesn't go down. In fact your inflation just made all the non-disposable expenses go up, leaving _less_ disposable for delevaging. As history has constantly shown - that is why we've been on the debt esculator, inflation provides more debt to be taken on, prices have gone up, so more debt needs to be used, salaries being higher enable this. Purchasing power drops.
A case of the slows
Wakey-wakey
News Flash - In 6 weeks the Australian government will deliver its 2015 budget, and the pre-release leaks are leaking out already. The latest buzz is the government will impose a Super Profits Tax on the banks by imposing a ½% tax on deposits. It has not yet been revealed whether it will apply to balances held or in the form of a FTT (Financial Transactions Tax) on incoming deposits
This is a variation on the MRRT (Minerals Resource Rent Tax) but the miners are feeling a bit poorly at the moment
and I have'ta say I been telling you so for the last 5 years
the 4 major banks should be charged an annual banking licence of $½ billion each. ... If they want to hang out their shingle and do business here then pay the licence fee
But what happens if money starts flowing the other way, like its doing in Greece, Russia and Brazil.
Then the SHTF and you have to make deposits attractive again. We can pretty much guarantee the government is going to stuff up .
NZ with low interest rates and a high currency risk, could see large out flows of capital happening in a hurry.
What's the next step going to be, capital controls?
Prime Minister John Key has said he will 'cut the Reserve Bank some slack' on the current target and referred to the bank's efforts to hit 2% as like a super-tanker that takes some time to turn. Mr English also seems relatively relaxed about the apparent breach of the target if not the deflation itself, saying New Zealand had a 'good type' of deflation.
Key at least is sort of consistent, and seems to expect the super tanker to be trying to hit 2%- its agreed target. English is going on about good deflation vs bad deflation- a largely nonsense argument. You infer from English's comments that in fact there are other undefined targets that the RBNZ should head for, without sharing what those should be.
Wheeler who is in charge of the super tanker does not give the impresson he is trying to head towards 2% at all. He either doesn't know where he's heading, or more likely, for some reason doesn't wish to share that destination with the rest of us.
In the meantime we have deflation- of virtually every commodity in the world- not just oil. And New Zealand has chosen a super high dollar platform to get through that. It seems very high risk as such a policy is guaranteed to lose market share in productive industries, and to have consumption funded by asset sales with a long term loss of wealth, although at least receiving highish amounts for the assets we are selling. Wheeler frustratingly suggests his super tanker has nothing to do with the high dollar; that he hasn't got a currency steering wheel. That becomes a perverse self fulfilling prophecy.
Deflation has winners and losers; it is high risk. There is not really good and bad versions of it though.
A good debate to be had, is what should our Reserve Bank actually be aiming at, and what tools should it have. At the moment the Captain of the ship is steering in a different direction than the one his bosses have outlined for him.
Agreed, the rest of the world has the ZIRP, and they are taking the market share. They are getting assets, including a fair share of NZ's, for freely printed money. Whether the world is best served by such free money you could debate, but it has been and largely still is. What should our response be in the face of that? I suggest protecting productive market share, and our asset base should both be high on the list.
The target in any case is 2% inflation (not some materially higher figure that you are hinting at), with 1-3% being achieved at any one time. That figure was clearly designed to minimise the risks of inflation/deflation. We are clearly missing the target, and it doesn't seem the captain of the monetary ship is in fact aiming to meet it; yet he hasn't articulated what other targets he is aiming at, nor apparently has he got them agreed with his political masters.
A key risk is that when the tide does go out, whether self induced or globally inflicted, what we have left may not nearly be as good as it could or should be, and the policy options then may be far from optimal.
If the RBNZ was genuinely aiming for 2% inflation then he would have dropped the OCR to about 2.5% by now and admitted that the 2014 four hikes were a big mistake.
Inflation is likely to be around 0 to .5% for the next 18 months or more, or longer, or even lower CPI.
So his new non-transparent target must be around .5%
On top of the 60 billion they already borrowed?
Whats most like;ly to happen is the dairy payout collapse spreads through the economy,the tax take collapses and the government has to decide to borrow or go down the austerity track. How do we replace the billions lost through low milk payouts?
Borrowing more could impact interest rates negatively for the borrowers amoungst us.
The overheads have spent enough.
The overheads are the problem.
The banks are repeating 2008.
Nobody to stop em.
When one cannot compete with idiots, then why bother running a business.
If not making money faster than others can print it, absurdity prevails, even when imported.
Theory is all well and good, but practical people win hands down, if allowed to work with REALITY.
And no that is not reality real estate, as we will soon experience have the first billion dollar leaky slum and the first loss making bonanza the world has ever known.
A derivative of other derivatives, miss guided futures and other such legal hallucinatory drugs.
I hope not in my lifetime.
Seems a few here object to even a fraction of a rate increase.
Nuff said.
Firstly, All of the world wide money printing has in fact been considerably lower than people realise.
Because most of the money printing was used to pay off debts.
Look at it this way
You print a million dollars and lend it to me for one year.
Next year i do not have the money to pay you because i have spent it.
So you print 2 Million more dollars to lend me so i can pay my loan to you (plus interest) and have a bit left ove.
This is reported that you have printed 3 million which is correct however one million was to repay you.
So the increase in the money supply, due to QE, is considerable less than we are led to believe.
The danger with having a debate about deflation right now is that people view it in light of what is happening now and so get the wrong impression. As i have been discovering trying to explain it over the past few weeks.
When you switch from one sytem to another there are ALLways irregularities. So it is no supprise that we are experiencing these irregularities right now and why some people are having difficulty understanding deflation in a stable economy.
And that is the key - being able to see deflation in a stable economy. I am not talking about prices crashing i am talking about stability of prices and incomes. The ideal would be 0% inflation/deflation.
We will never have a stable economy because it is in the interests of the wealthy to have a "Casino economy" where speculators make billions. Those speculators (like the JK money traders) would be stuffed in a stable economy. That is why it will never happen.
What about the Swiss National Bank thats buys Euros to protect it's currency and uses those Euros to buy US dollars and then buys 27 billiuon dollars of US equities, with money that cost it nothing?
Jump to 23 min in, but its all good stuff.
http://www.zerohedge.com/news/2014-12-06/jim-grant-sums-it-all-2-stunni…
We are in a situation where the governments attempts to manipulate statistics (aka fuzzy numbers) has backfired. While in the past government was focused on downplaying inflation by changing the weightings more toward the processing power of computers, broadband speeds and the size/quality of TV's. All of which masked the rising costs of essentials like fuel, food, power, housing, education, rates and insurance. Now because the methodology of calculating inflation has become so advanced it is impossible to have inflation because all the factors included are by nature deflationary.
That is the debate very few people had (and lost).
Shadowstats has US inflation at 4% by using a constant calculation from 1990, which when combined with +/- 0 wage growth for the bottom half of society is actually very bad news. Nobody likes to talk about that, so today we a have a tottaly irrelevant number, that isn't actionable because the factors are well outside the influence of monetary policy.
Failing to face this reality is tragic, but hardly surprising. If rent is going up, electricity is going up which combined is close to 50% of take home pay, how the f### can you honestly say we have deflation?
um no IMHO.
a) shadow stats has been outed as a downright lie. All he does is "decide" what the inflation rate is himself and then add a self-invented fudge factor onto the actual data. He doesnt even have a methodology to justify that fudge factor, or the end result he publishes. Its a lie, if you want to follow that, that is your problem. --edit-- Lots of ppl did by the way convincing themselves that serious inflation was on the way and bought gold and lost their shirts.
b) Its US data anyway, hence why you mention education? that has not increased, its free here in NZ. Are you even in NZ?
c) Housing is not in the CPI for a very good reason. The simplest is once you have bought you suffer no increases as a houshold, plus it has an asset capital value. On top of that we have a x2 or more speculative bubble in some areas.
d) you may have noticed that oil has fallen 50%? or maybe not.
The main point of why we measure inflation or deflation is to know the health of the economy overall and indeed per sector. From that we can avoid it over-heating too much or worse collapsing.
How can we say we have deflation? well because indeed failing to look at reality is indeed the problem. I suggest you learn that there are woods and trees and how to seperate them out.
Right so in your world, the cost of a degree hasn't risen, and its free anyway? Everyone owns a house so shouldn't be counted, and you put oil in your car instead of petrol which fell about 20c for the first time in years.
Double digit rent increase isn't inflation, double digit house cost increase isn't inflation etc. WHich is exactly my point, the way inflation is now calculated makes it irrelevant for most people, because it doesn't the big fixed expenses.
Ah right, tertiary education. yes there is an increase in the cost, but again not to me or for ppl not doing one right now. Oil == petrol, except the falling price of oil as its a feedstock into plastics, hence using oil encompasses far more. Are rents increasing significantly country wide or just in some hot spots? are houses increasing country wide or just some hot spots?
CPI is a basket of expenses for a household, So some things go up and some down. eg my broadband connection fell from$200 a month to $136 a month. My mobile phone from $39 a month to $29 these are real savings for my household, even before I bother that I get 50%+ more for that less expenditure. No it isnt irrelevent, its pointing to the health of our economy which has some serious issues. Nowif you want to gamble that the numbers others are inventing due to political dogma are sound, be my guest, its your money. Double digit house cost isnt nation wide, only in some areas of Aukland, ergo if you live rurally elsewhere you have seen no such inflation. On top of that like I said I have my house it is costing me no more this year than last even if its paper value has gone up 25% ie my mortgage payment is still the same.
"widening or lowering the target" not actually getting back to it?
Lets look at the risks of not, collapsing sectors/parts of the economy maybe? and then causing a recession/depression? If you look abroad there are enough instances where raising and/or keeping the OCR too high has caused the economy to shrink.
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