Introduction
Inflation is a problem that New Zealand has been facing for a long time. After 1996 the inflation rate in New Zealand kept rising and it even reached 17.15% in 1980. Although the inflation rate in New Zealand has been low from 1992 to 2020 it has suddenly risen to 6.9% in 2022. Many households are highly affected by inflation and if we don’t try to solve this problem as soon as possible we could face many problems in the future. This is why we chose to investigate this topic. The inflation crisis has been around for hundreds of years, and many governments have tried to control inflation but not all of them were successful. Inflation has caused many economic problems such as house prices rising, goods and services, and gas pricing significantly. So what should be done to solve the negative effects of inflation? And are there any benefits for the inflation crisis? Contractionary monetary policy and low inflation rate targets should be used to mitigate the negative effects on inflation.
What is inflation?
Inflation is the loss of purchasing power of a currency over time. The rate at which a basket of selected goods and services in an economy's average price level rises over time can be used to produce an approximation of the rate at which purchasing power falls. A price increase, usually expressed as a percentage, means that a unit of currency now buys less than it did before. The cost of living for consumers is influenced by the cost of living for households as well as the cost of a variety of goods and services.
Government organizations undertake home surveys to determine a basket of frequently purchased commodities and track over time the cost of purchasing this basket in order to calculate the typical consumer's cost of living. There are three main types of inflation, cost-push inflation, Demand-pull inflation, and built-in inflation. An example of extreme inflation is a jelly bean is worth 10c on Monday and by Friday the jelly bean is worth the same as a house. This is what happened in Hungary in 1941. 150,000% Increase Inflation rate.
What causes inflation?
Inflation can be caused by many factors but demand-pull and cost-push are the two most common causes of inflation. However, the causes of inflation in 2021 and 2022 are a little more complicated and include the government's response to the epidemic, as well as unexpected surges in demand in addition to coronavirus lockdown limits, which were lifted and labor shortages across the country.
Demand-pull inflation is one of the main causes of inflation. It occurs when the demand for certain goods and services is much higher than the economy's ability. When the demand of something is higher than the supply the prices rise causing inflation. An example of demand pull inflation is if you wanted to watch a show but there was a limited number of seats. This means that the demand for the show is higher than the capacity which could cause the price of tickets to rise. New zealand is highly affected by this type of inflation.
Cost-push inflation is the second main cause of inflation. Cost-push inflation generally occurs due to increases in the cost of wages and raw materials. When the cost of wages and raw material increase the overall prices increase of goods and services.
What are the negative effects of inflation?
The negative effects of inflation cause many problems for economies around the world, money loses its value when inflation increases As the prices of products go up, money loses value. Companies will make you pay more for supplies and services to keep up with the inflation rate. Causing the pricing for things to go up For instance, if you keep $1 under your pillow for ten years, you will not be able to buy as much as you could today due to inflation. If we look at the value of the US dollar between 1980 and 2019, we can see that the dollar has lost over half its value. In other words, you can buy half as many goods and services with one dollar as you could 30 years ago. So if you stored $1,000 under your bed in 1980, it would be worth less than $500 today. Purchasing power decreases dramatically, which means less bang for your buck.
What are the positives of inflation?
Although inflation has come across as destructive, inflation actually has some benefits. Inflation reduces the value of debt because over time it causes the value of the currency to decrease, then people who are in debt pay less cash back over time. Moridite inflation can cause a healthier economy because as the economy grows, demand for products increases. This increase in demand pushes prices a little higher as suppliers try to create more of the things that consumers and businesses want to buy. There is thin margarine, the government tries to maintain a 2% inflation rate.
How has inflation affected New Zealand?
As you can see in this graph, in march 2018 the inflation rate was at 1.1%. Up until March 2020, when it rose to 2.5 percent, the inflation rate was under 2 percent. The inflation rate continued to rise quickly after March 2021. In 2022 the inflation rate is at 6.9% which is six times more than what it was in 2018. A big reason for that was because of covid. This means that the price of living is increasing significantly which affects many people and their daily lives.
New Zealand has been highly affected by inflation. The annual inflation rate is at its highest point since 1990 when it reached 7.6%. At the moment during 2022, the inflation rate in New Zealand is at 6.9%, which was mainly driven by the housing and household utilities group, influenced by rising prices for construction and rentals for housing. Something that most people in New Zealand are concerned about are the gas prices. People are having to pay much more money for their groceries as well. Many citizens of New Zealand are struggling to pay for gas. Gas prices hit record highs in 2022, with every gas station advertising fuel for over $3 per liter and $3.30 is the maximum price per liter. Which is a lot higher than it was before.
What are some ways to bring down inflation?
controlling the money supply. The Reserve bank is responsible for evaluating the current conditions of the market, they decide if they need to lower or raise the discount rate that banks pay on a short term loan. If the federal reserve increases the money supply faster than the economy is growing, inflation occurs. Therefore controlling the money supply can control inflation. The increase in money circulating in an economy is higher than the increased goods that are produced.
Having inflation targets. Most governments set an inflation target which is usually low. An inflation target can be really helpful because it helps people to plan for the future. If the inflation rate is above the target, it will force the government to try to lower the inflation rate. New Zealand's inflation target is from 0 to 3 percent.
Investing money. Investing money in something like stocks can provide you with a much higher long term return. But there is always a risk in investing because you can also lose money. That is why investing a little bit of money in more than one thing can be much more helpful than just investing in one thing because they can balance each other out. You can choose to invest money in lots of different things like stocks, cryptocurrency, real estate
The greatest method to keep prices in check is to stick to a budget. Many people have started sticking to a budget recently as a result of inflation. Having a budget will make sure that you aren't spending too much money.
Contractionary monetary policy. A type of monetary policy known as a contractionary monetary policy aims to slow down the rate of monetary expansion in order to combat inflation. To avoid excessive speculating and unsustainable capital investment, the policy restricts the amount of money available in the economy.
What is the New Zealand government doing to bring down inflation?
Higher interest rates are a commonly used way of bringing down inflation, higher interest rates mean higher borrowing costs, and the cost for products and services will also be more expensive, over time people will slowly stop buying more products. And this will in theory lower the inflation rate by upto 3 percent.
By increasing federal fund rates, the Reserve bank of NZincentivizes banks and other lenders to raise interest rates on riskier loans and transfer more of their funds to the Federal Reserve, which is a no-risk institution, therefore reducing the money supply and lowering inflation.
Between April 1 and June 30, the cost of public transportation has been temporarily reduced by half. To enable cheaper travel for Kiwis, a $40 million NZ investment was made in the scheme. The primary goals of the action are to help those who are experiencing the most financial strain and to reduce pressures on New Zealand's inflation rate.
What is the best method to mitigate the negative effects of inflation?
I think that the best method to mitigate the negative effects of inflation is by using contractionary monetary policy and targeting inflation. I think that this is the best method because it is commonly used to control inflation. Many countries use this policy and most of them were able to bring inflation under control. So how exactly does this policy work? There are only three main things that are done to bring inflation down which are to increase the short term interest rate, raise the reserve requirement, and lastly expand open market operations.
Increasing the short term interest rate
The central bank can choose to raise the cost of short-term debt by raising the short-term interest rate in order to decrease the money supply. Since commercial banks will increase the interest rates they charge their clients, the rise in interest rates will also have an impact on consumers and businesses in the economy.
Raise the reserve requirement
Commercial banks are required to maintain the required minimum reserve in a bank vault and with the central bank. If the required reserve increases it would decrease the money supply in the economy.
Expand open market operations
By buying and selling government-issued securities, the central bank participates in open market operations. By offering substantial amounts of the government securities (such as government bonds) to investors, the central bank can lower the amount of money that is being circulated in the economy.
Conclusion
In conclusion contractionary monetary policy and inflation targets should be used to mitigate the negative effects of inflation. Inflation is a big problem and many countries suffer from hyperinflation. Inflation is making many people starve in poor countries. Every 1 in 3 people in Venezuela do not get enough to eat because of such high inflation rates. Inflation can occur at any given time, and can and does have massive effects on countries. This is why Aditya and I chose this interesting topic to dig deeper inside the economic world. And can we make a difference?