If we weren't hell-bent on eating, owning homes and keeping ourselves warm, we could kick this inflation thing for good

Okay, so, we are all in agreement: Let's stop eating, owning houses, and keeping ourselves warm in winter. 

Look, it's the only way we are going to kick this inflation thing for good.

And, yes, I am definitely joking. Call it gallows humour.

Amid all the talk about inflation rising again - something confirmed by the announcement of a 3.0% inflation figure for the September quarter, up from 2.7% in June -  the too-easy-to-overlook thing is just what's causing the inflation.

And at the moment, anyway, it ain't us. 

In accurately predicting the rise in inflation to the top of its 1% to 3% target range, the Reserve Bank (RBNZ) said - when cutting the Official Cash Rate to 2.50% on October 8-  that the rise in inflation would reflect "large increases in administered prices, food prices, and the prices of other tradable goods and services".

"Excluding the influence of administered prices, quarterly non-tradables inflation has continued to decline and is at levels consistent with price stability," the RBNZ said.

In other words real inflation is under control.

But the inflation figures are being blown out by "administered prices". That's right, those are the prices for things that we don't want to get charged for at all particularly. But we do get charged for them. Often through the nose. 

And for this we end up under the threat that mortgage rates can be increased. That's because the RBNZ's got to somehow get inflation in and around 2%, but 'some people' (those hiking our charges) clearly aren't that bothered about playing their part in keeping inflation low.

The good news is the RBNZ's very alert to the situation. It's something the bank bemoaned last year when inflation appeared to be coming down too slowly. 

It's one thing if inflation's going up because we are demanding and getting huge pay rises - thus fuelling inflation.

Darn those 'administered' price hikes

It's quite another if we are getting whacked by bigger rates bills, bigger power bills and supermarket shopping trolley loads that require a bank overdraft. We are hapless bystanders. And yet we run the risk of seeing interest rates forced up again. 

But clearly, as the above RBNZ comments tell us, the central bank is very on to it and therefore won't be deterred from continuing to push the OCR lower if it thinks the economy needs it. 

The reality is that the current official thinking is that (despite the erm, 'efforts' of those producing 'administered' price hikes), the overall weakness of our economy and the spare capacity in it will see overall inflation drop again next year.

So, expect that the RBNZ will reduce the OCR to 2.25% in the last review for the year on November 26 (with even the vague possibility if might go to 2.00% - although that's more likely to be discussion for the February review next year).

But what about that inflation?

Statistics NZ said in its October 20 media release that local authority rates and payments, up 8.8%, was the largest upwards contributor to the 1.0% quarterly rise in inflation. Those rate and payment hikes accounted for over a quarter of the 1.0% increase.  

In terms of the 3.0% annual increase, the largest contributors were: electricity – up 11.3%, rent – up 2.6%, and local authority rates and payments – up 8.8%.

Between them, electricity and local authority rates and payments made up just under a fifth of the annual rate of inflation. And what were we supposed to do about these charges arbitrarily whacked on us, other than pay them?

Is this all fair?

It is not a new argument, but I think it's as valid as ever, to ask: Why should we be disadvantaged and expected to toe the line on inflation between 1% and 3% when Government and local government particularly don't seem to play by the same rules?

To just look at the 'headline' annual inflation figure of 3.0% as at the September quarter would be to suggest that interest rates should be going up again.

Now, as we know, they are coming down and will continue to do so. But it's an odd situation that needs looking at.

The RBNZ has said previously that only about a third of New Zealanders have mortgages.

And yet as we know, it is those mortgage holders that form the front line when it comes to the inflation battle.

They are the ones specifically targeted with higher interest rates in order to reduce spending and to take the steam out of the economy.

And they are the ones that theoretically can end up with their mortgage interest rates increased because rounds of government and local authority price increases are forcing up inflation.

There's a couple of ways of looking at this problem.

We could separate out the 'administered' price increases from the inflation rate when setting the target the RBNZ adheres to.

Or could we somehow definitively restrict 'administered' charges?

There's problems with both options.

If we 'take out' some elements from official inflation targets, such as those administered price increases, then we do run the risk of just allowing overall inflation to run at higher levels. Which could be harmful. When all is said and done, we can if we want choose to ignore rates increases from official figures - but these are an increase of prices and they will have an impact and could cause secondary waves of inflation.

And then there's the second option of simply attempting to restrict government and local authority price increases. Well, I actually think it's definitely an idea with some appeal, but I also think, good luck with trying to implement it.

Time for a debate over inflation targeting

I think there is unquestionably room for debate about just how we target inflation. Maybe an arbitrary number doesn't work any more. 

And I also wonder whether it still properly works to specifically hit the one third of kiwis that have mortgages with higher interest rates to do the heavy lifting when it comes to getting inflation down. 

Doubtless the RBNZ would say that hiking the OCR all the way up to 5.5% ultimately 'worked' because inflation was eventually pared back from the cycle high of 7.3% back into the 1% to 3% range. 

But it took a long time. And I think in order to produce the eventual reduction in inflation, those interest rates were raised to a point that have caused a kind of 'bruising' of the public's mentality, which might explain why even though interest rates are now coming down, nobody is rushing out to spend money.

The RBNZ itself has commented on the "cautious behaviour" of households.

It seems to me that maybe a fair few people have just got out of the habit of spending and won't feel encouraged to do so again until they see things picking up. But of course, things don't pick up if people don't spend...

Look, I think we will see signs of economic recovery over the summer months, but what we really don't need is for any overseas-sourced inflationary shocks.

In the meantime, I think the whole experience of the past few years and our handling of inflation provides ample basis for discussions of whether there is a 'better way'.