What is Inflation ? There is a lot of talk in the news about the fact that we are seeing a significant spike in the costs of things like building supplies and now electronic goods.
The current spike in prices is due in part to two things.
As part of the Covid economic response, Governments around the world have printed or borrowed huge amounts of money to provide economic stimulus through wage subsidies, business support and welfare. Just this week, the “American Families Plan” has seen the US Government pay up to 161 million people a payment of up to $1,400 US per person to help with their Covid recovery.
Having trillions and trillions of dollars sloshing around in the global marketplace looking to be spent means that potentially there is more competition for resources. Economics 101 – at the point at which demand meets supply, you get price equilibrium. The higher the demand with the same amount of supply, the higher the price.
The other issue that we are seeing right now is that there is also a lack of supply. Many production lines around the world have been disrupted due to Covid lockdowns. We are also seeing disruptions with movement of freight. There are not as many airplanes flying so air freight is limited and is also expensive (limited supply, big demand). There also seems to be a real issue with shipping freight. After Covid, it took a while to get shipping containers redistributed around the world, as well as shipping crews. In NZ, we have had delays with getting ships unloaded at our ports. Lower supply with higher demand means much higher prices for goods.
It looks like we are facing a “wall of inflation” over the next few months. Inflation means that the value of a dollar drops over time as goods cost more. If incomes don’t keep up with inflation, it means that people are having to make do with less, and their standard of living is reduced.
While there is a lot of noise about inflation, it does appear that it is likely to be a short term phenomenon. I like the “wall” anecdote, as it is potentially going to be like one of those assault course walls. We are probably going to have a massive climb in inflation and then just as quickly, a massive drop on the other side. If we continue to have ongoing freight distribution issues, this could mean that we have to sit at the top of the wall a bit longer than anticipated, and we won’t like the view from up there. However, inflation will come back down.
At this point, one of the issues that could make inflation “sticky” is wage inflation. This is where we have a massive shortage of labour and it means that employers are having to pay people more to hire them or to retain them. Wage inflation will flow through into businesses having to pass on higher labour costs via price increases to their customers. If the current immigration rules are not relaxed within the next year, we may see wage inflation.
The Reserve Bank also has tools that it can – and will – use if inflation starts to get away a little bit.
Hopefully inflation will not be a long term issue and cause problems in the NZ economy.
Janet Natta is a financial adviser and director of Smart Money Advice, offering investment portfolio construction and management services to clients throughout NZ, as well as comprehensive financial planning advice to assist clients to build and protect wealth to achieve their dreams.
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