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Economists tend to worry about spiralling inflation when wages and prices ratchet up against each other, but even when this does not happen, a serious one-off inflation is just as insidious.

In most Western countries, consumer prices have increased by close to 10 percent over the last year. This makes us all worse off because we can’t buy as much with the same amount of money as last year.

Economists usually focus on the annual increase in the CPI, but we need to be careful about that because even if rice inflation slows next year to 2-3 percent, the effect of the 10 percent inflation we experienced this year does not go away. The recent increase in prices will be there forever (unless prices fall dramatically, which rarely happens), so we will continue to be close to10 percent worst off than before, unless we can earn or negotiate a compensating increase in our income.

To understand the real effect of price inflation, we need to look at the change in the CPI over several years. The New Zealand measure of consumer price inflation has increased by more than 50 percent. This cumulative increase has slowly, but severely, eaten away at the value of fixed incomes.

More in God’s Economy.


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