Matthew Hooton: Don’t ‘look through’ inflation; kill it right now
Friday, 24 July 2026
OPINION: Corporate welfare isn’t the only evil from the 1970s and early 1980s that’s back. We’re also being told not to worry so much about inflation any more. Better just to ‘look through’ the reality of rising prices in the shops.
On Tuesday, Stats NZ reported inflation was up to 4.1% in the June, quarter, marginally above the 4.0% expected. That’s more than twice the 2% midpoint the Reserve Bank is meant to target.
That wouldn’t be the end of the world if we could be confident inflation would stick around 4% for a while and then return below 3%. But we learned in the 1970s and 1980s that that doesn’t happen. We then learned the lesson again - or should have - over the last five years.
When inflation last rose above 4%, in the September 2021 quarter, the Reserve Bank and Government assured us it was mainly a foreign and lockdown thing, out of their control.
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In its next monetary policy statement, Adrian Orr’s monetary policy committee decided to raise the official cash rate (OCR) by only 0.25% to 0.75%. That’s despite it admitting inflation would exceed 5% in the near term, blaming oil prices, transport costs and supply shortfalls.
No worries, though. Orr’s committee purred that inflation would return towards the 2% midpoint in 2022 and 2023. It didn’t.
Through the first half of 2022, the committee maintained stimulatory monetary policy, with only modest increases to the OCR.
In February, it conceded inflation was “well above” its target, but “will return towards the 2 percent midpoint over coming years”.
In April, it said that “moving the OCR to a more neutral stance sooner will reduce the risks of rising inflation expectations”. But it then didn’t move it to a neutral stance, usually regarded to be around 3%, plus or minus a bit depending on economic conditions and changes in productivity.
The committee also had a new villain to blame for inflation in Vladimir Putin. “The Russian invasion of Ukraine,” it said, “has significantly added to … supply disruptions, causing prices to spike in internationally traded commodities and energy.” It acted cautiously since “the pace of global economic activity continues to slow”.
In May, the committee still maintained a stimulatory stance, increasing the OCR to only 2%. Inflation remained everyone else’s fault, including Putin and Covid, and economic headwinds were “strong”, with “[h]eightened global economic uncertainty and higher inflation … dampening global and domestic consumer confidence”.
According to Orr, “we are focused on inflation one to two years ahead because that helps us look through to the core parts of the inflation, and adjust conditions to achieve that”.
In July, his committee declared itself “resolute in its commitment to ensure inflation returns to within the 1-3% target range” but kept arguing global growth was slowing. “The broad-based tightening in global monetary and financial conditions is acting to reduce spending growth. Asset prices have also declined due to higher interest rates and a weaker earnings outlook.” Stimulatory monetary policy broadly continued.
Then inflation was reported at 7.3% for the June quarter. Only then did Orr’s committee finally move to a neutral monetary stance. And only in October 2022 did monetary policy become genuinely contractionary.
New Zealanders then endured two years of high interest rates to drive inflation back below 3%. It never got to the 2% midpoint target. Despite that, neutral monetary policy returned in August 2025 and became stimulatory in October. It remains so.
You’d think no one would want to go through that again, especially if we had options to avoid it, which we do.
It’s now more than six months since inflation broke through the 3% top-of-target, ahead of Christmas. It has kept rising all through the year to the 4.1% reported on Tuesday.
Once again, too many economists are arguing - just as in 2021 - that we can take our time to deal with it. Kiwibank’s chief economist Jarrod Kerr, ironically among the first to warn last time that “the inflation beast” was back, now says the Reserve Bank marginally reducing its stimulus this month was “reckless” and “jump[ing] at shadows”.
He apparently no longer stands by his 2022 view that inflation is “public enemy number one”.
He thinks we ought to tolerate prices rising faster for longer in order not to risk the alleged economic recovery.
He may have friends in high places. Reserve Bank governor Anna Breman argued at the committee’s last meeting “that if demand remains weak, firms may have less ability to pass higher costs on to consumers”. She said that “intelligence from recent business engagements point to divergence in [their] ability to pass on cost increases”.
The committee kept monetary policy “accommodative”. It said “annual headline inflation is expected to return to the target mid-point in mid-2027”. Heard that before? It declared that “inflationary pressures in the medium term will depend on price-setting behaviour”. Who knew?
The problem is that the medium term is always in the future. It never arrives. And so it seems actual inflation never gets to the 2% target midpoint. It was last at or below the midpoint in March 2021, more than five years ago.
Parliament is absolutely clear in the Reserve Bank Act that the bank’s top objective must be “achieving and maintaining stability in the general level of prices over the medium term”. Arguably, this means it should aim for 1%. That was its original target when the band was set at 0-2%, on the grounds 1% covered the general level of improvement in goods and services we should expect to pay for. But politicians later went soft and settled on 1-3%.
Almost immediately upon becoming Minister of Finance, Nicola Willis instructed the bank “to return … to a single focus on inflation” rather than also trying to worry about “maximum sustainable employment” the way it had been ordered to in 2018 by the Labour-Green-NZ First Government. Willis, like most mainstream economists, argues there is no tradeoff between inflation and unemployment: if you tolerate inflation, you’ll soon suffer higher unemployment as well.
The bank, she confirmed, would be required to “achieve and maintain future annual inflation between 1-3% over the medium term, with a focus on keeping future inflation near the 2% mid-point”. Is it really doing that?
Wouldn’t it be interesting if someone - perhaps the Taxpayers’ Union - decided to test in court whether the bank is following its legally and politically mandated obligation to kill inflation when it goes outside the band? Or is Breman’s bank continuing to ‘look through’ the reality of rising prices to a future that never arrives?
There’s no easy choice. If we want prices in the shops to stop rising so fast, we have to pay higher interest rates now. If we don’t, we’ll have years of misery ahead, like the bleak times from 2022 to 2024 which we spent paying for Orr’s committee deciding to ‘look through’ reality in 2021 and early 2022.