Price pressures will force our economy to become more flexible and efficient – and thus less vulnerable to embedded inflation
Opinion: The strongest annual inflation rate in 32 years made an arresting headline on Monday. But while a hike of 7.3 percent is an issue for all of us, we need to keep it in perspective in terms of its breadth, depth and likely persistence.
First, inflation is still relatively confined. Three sectors accounted for 5.5 percentage points of the rise – housing, transport and food.
The first was driven in large part by an excess of easy money from the Reserve Bank, which was bad. But also by increased construction, which was good, even though that exacerbated supply chain shortages and higher prices. Both are likely to persist, unless the housing market contracts sharply.
The other two were driven largely by politics and commodity price shocks overseas, which are unlikely to ease much over coming months.
Second, there is real potential that rising prices in those sectors will cause consumers to seek bigger wage increases and producers to seek bigger price increases. In other words, expectations of widespread inflation becoming embedded in people’s behaviour.
That’s where we’d head into uncharted territory. It’s hard to predict what will happen because periods of far higher inflation in past decades will be a poor guide to this new future.
From the early 1970s to the early 1980s annual inflation in many countries, including ours, was running in roughly the 14-18 percent a year range. Then like now, politically-driven fuel price shocks were one factor.
Far more important, though, was the greater rigidity of economies then, compared with today. Companies had more pricing power because many sectors had limited competition or price transparency. Workers had greater collective bargaining power through unions. The contest between them created wage-price spirals and deeply embedded expectations of inflation.
Central banks were also hobbled in their fight against inflation by limited policy and regulatory tools, and excessive political intervention.
These days, many economies and societies, particularly ours, are more open and more flexible. Thus, producers and consumers have greater scope for coping with inflationary pressures. They can adapt, innovate and make choices, albeit some of them painful.
Given those dynamics, inflationary pressure is likely to make our economy more flexible and efficient, and thus less vulnerable to embedded inflation.
That’s a far better outcome compared with three or four decades ago when high inflation caused our economy to ossify.
But even better, we can invest to increase our economic capacity and better fight inflation by building a sophisticated, sustainable and climate compatible economy.
Renewable energy, highly energy efficient homes, long-lasting and repairable consumer goods, less-labour intensive manufacturing, active and public transport, and circular economy principles are just some ways to achieve a high value, deeply sustainable and low inflation future.
The power of climate leadership
This past Monday, the five UK Tory MPs who were still locked in a fierce contest to be the party’s next leader and the country’s next Prime Minister, unequivocally pledged support for the UK’s commitment to net zero carbon emissions by 2050.
This was a shift, ranging from small to big depending on each candidate’s point of view, from their less than enthusiastic positions the previous week. Their lack of conviction prompted widespread concerns in business and wider society that the country’s long-standing political consensus on tackling the climate crisis might be breaking down, as I reported in my column last week.
Did the record-smashing UK heatwave change their minds? No. The political and public response to 40C temperatures – fully 1.5C above the previous high – wildfires and declaration of emergencies in some parts of the country, has prompted lots of discussion and debate. But few signs yet of more urgent action on climate.
Instead, it was one man’s leadership that changed the candidates’ minds. Alok Sharma, the UK Cabinet member who led last year’s COP26 UN climate negotiations in Glasgow, said a total commitment to the net zero agenda was “absolutely a leadership issue” for whoever leads the country.
Anything less, he said in an interviewer in The Observer, would do “incredible damage” to Britain’s global standing, as well as irreversible harm to the economies of the UK and other countries.
Pressed on whether he would resign if the party’s new leader wavered on the issue, he replied: “I don’t rule anything out and I don’t rule anything in.”
Sharma, who is President of the COP until November when he hands over to Egypt, the COP27 hosts, should have been in Germany this week for global negotiations to try to advance COP’s stalled agenda.
But he had to stay in London to vote in his party’s successive round of leadership ballots. His intervention was crucial, thanks to his climate credibility at home and abroad – he’s in the running to be the next executive secretary of the UN’s Framework Convention on Climate Change, the parent body for the COP negotiations.
Yet, his impact on his colleagues was limited, nonetheless. The Conservative Environment Network had hosted a meeting to give each candidate 15 minutes to spell out their positions on environment and climate policies. Even Kemi Badenoch, the most anti-climate of them, expressed support for net zero just a week after saying UK attempts to pursue that target amounted to "unilateral economic disarmament".
The plain truth is climate will all but disappear again from the debate as the Conservative Party picks its next leader.
But whoever wins can’t ignore the issues. Just hours after the candidates’ pledges on Monday, the High Court ruled that the UK Government's current net zero strategy is unlawful and inadequate. Justice Holgate ordered the government to update the plan and provide more clarity on precisely how it will meet legally binding medium and long-term emissions targets.
In his verdict on the case brought by Friends of the Earth, ClientEarth, and the Good Law Project, Justice Holgate agreed the strategy lacked sufficient explanation or quantification as to how the government’s decarbonisation plans in its net zero strategy published last autumn would achieve emissions targets for the 2030s and beyond. He ruled the government had failed to meet its obligations under the Climate Change Act 2008 and ordered Ministers to update the plan and present it to Parliament by April 2023.
Here in New Zealand, we urgently need similarly strong political and judicial leadership on climate. The next big test for politicians comes in council elections this year and the general election next year.
The next big test for the judicial system is the case brought by Lawyers for Climate Action NZ.
It is seeking a judicial review of the Climate Change Commission’s advice to the government on the latter’s updated New Zealand commitment under the Paris Agreement.
The High Court hearing concluded in March. But Justice Jillian Mallon has yet to deliver her verdict.
When she does, it will be a key test of what judicial help citizens might expect when they seek to make politicians accountable for their climate policies.
