Inflation — what’s past is past. Maybe this has happened to you?
You are arguing with a family member, and they pull out something that happened decades ago.
Maybe you broke their favourite toy, crashed their car or forgot their birthday. And you think, yes, I did that. Years and years ago.
And I’ve apologised, many times.
Can’t we leave it in the past? That’s how I feel every time there is an inflation announcement in New Zealand.
Let me explain. Every quarter, Statistics NZ releases data on inflation. Every quarter, we hear about the new annual rate of inflation.
Each time, the number is presented as news — that is, as new information we need to know.
The problem is that threequarters of that number is old information.
Stats NZ drops off the quarter from a year ago and adds on the latest quarter. The other three quarters stay the same.
When inflation is stable, it doesn’t much matter. When the Reserve Bank is working hard to reduce inflation, it matters very much. The inflation rate is useful information for businesses for a couple of reasons.
One is thinking about pricing decisions and consumer spending.
Will my customers have money to buy my product and how much are they likely to spend? The other is financing decisions.
What is likely to happen to interest rates, can I carry my current debt, and could I take on more?
Interest rates are affected by judgements about inflation, so the two are linked.
Those business decisions are about the recent past and the near future.
That’s the information that’s useful.
It is true that information about the most recent quarter is available. But you have to look for it.
For example, in the most recent announcement, the headline was ‘‘annual inflation at 6.0%’’, and the first two sentences repeated the 6.0 number.
In the second half of the announcement, we find out what we really need to know. Quarterly inflation was 1.1%.
On an annual basis, that’s 4.4%. So, inflation has come down dramatically.
That rate is much closer to the Reserve Bank’s top rate of 3%.
It’s good news for the economy and businesses. There’s an easy fix.
Reporting on the inflation rate should focus on the most recent information.
It should tell us what is new rather than what we already know.
Maybe then we can stop getting hung up on the past.
