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Source: Thinkstock
"Cost of livin' gets so high, rich and poor they start to cry."
I could be wrong, but I'm guessing Finance Minister Bill English and Prime Minister John Key aren't too familiar with that classic lyric from the Bob Marley tune - "them belly full (but we hungry)".
If they were, perhaps they might not have been quite so quick to take credit and crow loudly this week about inflation hitting a six-year annual low of 1.5%.
Because whilst the cost of living seems low right now, there are still some big nasty - and largely GST inspired - inflation hurdles coming New Zealand's way over the next few months.
And if things do not go to plan with the economic recovery in coming months, that 'cost of livin' thing, as Bob put it, could well end up being a major election headache for National next year.
It's politics
Now, an inflation rate of 1.5% does look pretty good when compared to the 5% inflation recorded in the dying days of the last Labour government.
So I can understand why National was highlighting this point and talking up its economic management. It's politics after all, and Labour would do the same.
And, generally speaking, I think English has actually struck a good balance between reining in government spending and also leaving enough government cash in the economy to keep up demand.
His management through this crisis has been sound and his policies (regardless of whether you think they have worked or not) have had the right goal at least of trying to rebalance the economy away from spending back towards saving and exports.
But does the government really deserve to claim credit for keeping inflation low? Couldn't it be argued that low inflation is really just a reflection of how weak the economy is? The fact is, we have still not really recovered fully yet from the worst financial crisis of a generation.
Consumer confidence is poor, unemployment is high at 6.8%, and the rate of credit growth in the economy is minimal. There just isn't a lot of underlying private sector demand out there putting pressure on prices.
Government charges
In fact, quite a bit of that 1.5% inflation comes from government charges and increases like excise taxes.
And I would have thought to judge inflation properly we probably need to wait to see how it reacts when the economy starts really picking up and there is strong demand again for workers and resources.
This is what we often call the economy's "speed limit".
In the past, New Zealand's tended to bounce back strongly from recessions, topping the speed limit, creating inflation, and prompting a series of Reserve Bank interest rate hikes.
Hopefully this time around it will be different. Maybe all the efficiency gains, fat trimming and debt repayment from the recession will pay off in the form of a real productivity gain and we will be able to go grow faster than before.
Inflation at 1.5%, with an economy growing at say 4%, would certainly be worth crowing about and I hope this is what happens, but I can't say I'm confident it will.
Heavy discounting
Part of the problem is that some economists like those at the BNZ don't really think 1.5% inflation is that low given where we are in the economic cycle.
They point out that its actually heavy price discounting from retailers and the high kiwi dollar that are helping to keep consumer prices down.
A high dollar makes imported goods cheaper.
Some other economists will scoff at this of course claiming bank economists have long been overly obsessed with the importance of inflation.
GST hike
Now on top of all of this is the guaranteed increase in prices from the GST hike that will start kicking in from next quarter.
As we know, the Reserve Bank will look through this and, assuming the hike doesn't flow through into second round pricing, a blip of say 4-5% inflation early next year should fade over time.
For National it is crucial that it does.
Should inflation levels prove sticky and hold up around 5% for a long period of time next year, then the PPTA teachers' strikes we've seen this week will seem like child's play.
Many families in New Zealand are still really struggling and those that are getting pay rises, are only getting about 1.5% on average according to the Labour Cost Index.
It's true that nearly all workers do come out ahead from the personal tax cuts which are accompanying the GST rise, even if it is only by a small amount for those on low incomes.
But National would be foolish to assume that will translate into votes next year.
A recent RaboDirect survey showed 58% of Kiwis don't think they will be better off from the GST and personal tax changes.
Labour knows this.
And while its proposal to drop GST on fruit and vegetables might not be a huge economic windfall for families, it could yet be a very effective political tool in an election that might be fought over the 'cost of livin'.
