Sadly, it seems the NZ Treasury's Chief Strategist Struan Little doesn't understand inflation.
Speaking to the NZ Capital Markets Forum, he gave the audience a helpful rule of thumb for fuel price rises here:
[E]very US$10 increase per barrel of oil roughly translates to 10 cents a litre extra for New Zealanders at the petrol pump. Therefore, prices at around US$100 a barrel mean a 40 cents a litre increase in New Zealand.That's helpful. The conclusion he drew from that however is not:
In that scenario [he said] ... the impact on CPI [i.e., of the official inflation figure] would be around 0.5 percentage points – that is around 3.1 – 3.2% instead of 2.7% in the baseline in the year to June 2026.
This is nonsense.
Yes, there will be a rise in the specific price level of oil. But unless there is a concomitant rise in the local money supply, there is no way that can cause a rise in the general price level, which is what the CPI is supposed to measure.
In fact, in the absence of a concomitant rise in money supply, the impact on the general price level will be precisely zero because to spend more on fuel means having to spend less on other things.
Yes, the price rise for oil does affect almost every thing in the economic system. Which makes a problem for all of us. But the only way for all those other things to rise in price as well is for there to be an across-the-board increase in monetary demand. And the only way that can be possible is for there to be an increase in the supply of money available -- the most likely cause of that in the present environment being governments continuing to borrow too heavily.
Little's error is an example of what economist George Reisman calls the myth of Crisis-Push Inflation -- a subset of the myth of so-called Cost-Push Inflation. It's usually a way for politicians to deflect attention for their profligacy in borrowing.
At least Little does call that out, even if he falls prey to that other error.
1 comment:
I haven't studied economics the way you have, but having difficulty getting my head around your contention. I appreciate that if the money supply remains constant, more money spent on fuel means less money spent elsewhere. That's easy. But for it to have zero effect on CPI, that would have to mean the price of other things measured by the CPI goes down by a commensurate amount. But why would the price of other goods go down?
I can appreciate the total expenditure across the economy would remain the same. But why couldn't it be that fuel and fuel related expenditure goes up, the price of non-fuel related good stays the same - and the balance is achieved by less money being spent on non-fuel related goods? Or alternatively less volume of fuel being purchased, which to some degree would be happening in regards to non-crucial travel.
In other words, why can't it be that the $ value of expenditure remains the same, but those same $'s are purchasing less because prices have generally gone up?
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