The Cost of Living Crisis
Upton Price considers the cost of living crisis, inflation, and the common myths and explanations for both. First published in October 2022.
The phrase ‘cost of living crisis’ has been a feature in political discourse in recent months. But aside from being a good cudgel for the opposition to beat the government with, what can we say about the cost of living in New Zealand? What is inflation and what are its implications in a capitalist economy? And what responses are appropriate to best insulate workers and build capacity to cope with future shocks?
Economists define inflation as a general increase in prices in an economy. An increase in prices means that money is losing its value. In an economy with high inflation, a dollar today has less purchasing power (i.e. it purchases less goods and services) than it did yesterday.
The main measure cited in debates about inflation is the consumer price index (CPI), which measures the prices of a representative basket of goods and services purchased by consumers and aggregates them into 11 subgroups such as food, alcoholic beverages and tobacco, housing and household utilities, and transport. The CPI increased 7.3 percent in the year ended June 2022, the largest increase in 32 years. Construction of new dwellings (up 18.3 percent), petrol (up 32.5 percent), and rents (up 4.3 percent) were the main contributors to this increase. Existing dwellings are excluded from the CPI as they do not add to the current housing stock.
Other less talked about measures are the household living-cost price indexes (HLPIs), a suite of 13 different indexes that cuts the CPI data by different household types: beneficiaries, Māori, superannuitants, income quintiles (five groups), and expenditure quintiles (five groups). This data also includes interest payments rather than construction costs, a feature of it being a cost-of-living measure. In the year to June 2022 the HPLIs all-households measure increased 7.4 percent, beneficiaries 6.5 percent, Māori 7.6 percent, superannuitants 6.6 percent, lowest spending households 6.5 percent, and highest spending households 8.1 percent. However, over the long run, lowest spending households have seen their costs increase much more than highest spending ones – up 39.5 percent compared to 25.9 percent since the series began in June 2008.
Stats NZ also produce two monthly inflation measures, the food price index (FPI) and rental price index (RPI). In the year to July 2022 the FPI increased 7.4 percent, while the RPI stock measure increased 3.9 percent. Another important measure is the producers’ price index (PPI) which measures input and output prices in various industries. In the year ended June 2022 the PPI input index increased 9.7 percent, while the PPI output index increased 8.5 percent. This indicates that there are further price increases to come for consumers, as firms pass those costs on.
What does all this data tell us? Effectively, incomes are going backwards without a pay rise. If you work 40 hours a week on minimum wage you earn $848.00 (before tax). At the current rate of CPI inflation, your purchasing power has declined 7.3 percent. Your real income is only $786.10 per week compared to $831.04 if inflation was 2 percent. It’s useful to compare these indexes to a measure of wage inflation. The labour cost index (LCI), which measures the cost of labour paid by employers for equivalent units of labour (not wages received by workers,) increased 3.4 percent in the year to June 2022.
New Zealand is not the only country currently experiencing higher levels of inflation. Indeed, it is a global phenomenon which has generated much debate. But is this current surge driven by demand supply?
The demand story emphasises the effects of central bank quantitative easing (‘money printing’), low levels of unemployment, and excess savings built up during the pandemic, to explain why inflation has suddenly risen. This led to excessive demand, pushing prices up in a case of ‘too much money chasing too few goods’. However, quantitative easing had a much greater effect in the housing and stock markets than in shops. And, as we saw above, wage inflation is lagging consumer inflation by a considerable amount. The dreaded ‘wage-price spiral’ is not a real-world phenomenon.
In my view, it is the massive supply and production shock caused by COVID-19 and the chaos it has wreaked on supply chains that has driven inflation. Lockdowns meant goods were not being produced as workers stayed home (or were in hospital), supply chains and logistics came to a halt, and normal social life was replaced with isolation at home. Any increase in demand was caused by this shock to supply. Furthermore, the war in Ukraine has also sent commodity prices for crude oil, cereals, and metals skyrocketing.
Added to this supply story is corporate profiteering. FIRST Union researcher Ed Miller has shown that corporate profits spiked by ‘an unprecedented 39 percent’ in the year to March 2022. ‘Make hay while the sun shines’ appears to be the mantra in the corporate sector as firms take advantage of the current crisis to increase their profits.
These differing explanations have consequences for how we respond to inflation. The standard response is for the Reserve Bank of New Zealand (RBNZ) to raise the Official Cash Rate (OCR), the wholesale interest rate at which the RBNZ lends to commercial banks. Raising the OCR increases the interest rates banks charge. Higher rates for consumers and firms dampens demand by making credit (mortgages, personal and business loans) more expensive and making saving more attractive. Money is effectively drawn out of circulation, and inflation subsides as demand is curtailed.
But when inflation is supply driven, particularly by foreign goods, raising the cost of borrowing has little effect on inflation. If anything it could make the situation worse, as mortgages, rates, and rents rise further with higher borrowing costs, whilst the price of imported fuel, and food which is grown here but sold at world prices, keep rising too.
So, what to do? National and ACT claim that reckless government spending during the pandemic has contributed to inflation and we need to reign it in to relieve cost of living pressures. This isn’t supported by the data. Analysis by the Council of Trade Unions shows that inflation rates are similar across countries, regardless of whether they spent a little or a lot (in percentage of gross domestic product terms) on their COVID response. Other orthodox responses are for wage restraint and higher unemployment, options that obviously fall disproportionately on workers.
Another argument, common in New Zealand and popular with liberal commentators, is that we need more competition, particularly in the food and fuel retailing sectors. More industry players will drive prices down and better regulation will help consumers get a better deal. These measures might help in ‘normal’ times, but I fail to see how, say, five supermarket chains rather than two would lead to better outcomes. Indeed, in countries the liberal commentators often point to as examples of well working markets, such as Denmark, we still see similar levels of inflation as here.
More heterodox analysts argue for measures such as strategic price controls, more akin to those enacted during both World Wars than under Muldoon. Economist Isabella Weber has put forward the case for the U.S. and argues that the end of World War Two ‘required a sudden restructuring of production which created bottlenecks similar to those caused by the pandemic. Then and now large corporations with market power…used supply problems as an opportunity to increase prices and scoop windfall profits.’
So, what can we do? Grant Robertson is quite right in saying that the government can’t influence prices for commodities on international markets. Is it just a storm we must weather? Marxist economist Michael Roberts points out that:
There is an alternative to monetary or wage restraint, these policy proposals of the mainstream, acting in the interests of bankers and corporations to preserve profitability. It is to boost investment and production through public investment. That would solve the supply shock. But sufficient public investment to do that would require significant control of the major sectors of the economy, particularly energy and agriculture; and co-ordinated action globally.
That might be a pipe dream right now, especially the global part. But the commanding heights were once our goal and current conditions should sharpen our focus back to those lofty peaks. In New Zealand we didn’t have a Sanders or Corbyn, we got Jacinda Ardern and the politics of kindness. But kindness doesn’t buy nappies or keep the lights on. Kindness runs up against material limits. And even if Labour lose in 2023, we will continue to lurch from one cost of living crisis to another, regardless of whether Labour or National occupies the government benches.
I don’t agree with the politics of the parliamentary protestors, but if we didn’t have this kind of pressure on people’s pay packets it's possible there wouldn’t have been such ugly scenes at parliament, or that up to 30 percent of the population would support their cause. Yes, there were provocateurs, right wing conspiracy pushers, and some genuinely dangerous people participating. But there is still the question of why there was fuel to spark their ideas and their anger. The failure to invest in public infrastructure, distribution, and production which has led to the accelerating costs, must surely be a contributing factor.
Socialists should continue to put forward the case for public investment and socialised production and distribution. The cost -of -living crisis opens this conversation up and highlights many of the fallacies of conventional economic thinking, as well as the limited nature of the politics of kindness and the corrosive social outcomes of politicians who refuse to rise to the challenges of governing. As the British Enough is Enough campaign states: ‘Fair pay, affordable bills, enough to eat and a decent place to live. These aren’t luxuries – they are your rights!’