The latest inflation statistics demonstrate the wealth transfer from the traded economy to the non-traded economy. This must stop say the New Zealand Manufacturers and Exporters Association (NZMEA). Statistics New Zealand’s March quarter figures show non-traded inflation up 1.2% from the previous quarter with traded inflation down -0.4%.

NZMEA Chief Executive John Walley says, “New Zealand’s monetary policy essentially works by lifting the level of the exchange rate to suppress inflation in the traded sector. The problem with this method is that inflation in the domestic economy remains unchecked. Over a period of time this has lead to lower activity in the traded sector while spending has not been restrained in the domestic economy.”

“Since 2004 non-traded inflation has averaged 3.8% while traded inflation has averaged 1.75%. Essentially the traded economy is subsidising activity in the non-traded economy.”

“The current account deficit shows the problem with this strategy,” says Mr Walley. “When you run a deficit you have to sell assets or borrow as the Government is doing now.”

“Instead, export success, and therefore the exchange rate, must become a focus of monetary policy. This will help reduce foreign debt, increase foreign earnings and, over the long run, increase growth and incomes.”