Cost Push, Not Demand Pull Inflation, By Ken Grundy

Dear Editor

We are about to benefit from the rebate on power bills at the rate of 83 cents per day. In addition, there will be some reduction in income tax for some of us.

Would you believe the Reserve Bank and numerous economists are fearful that this extra money in our pockets will set off 'demand inflation'? Demand inflation occurs when consumers are keen to turn their cash into more and more goods and services. This causes inflation to rise.

How could demand inflation apply to present day events? Letters to papers constantly refer to people living on 'struggle street' which is confirmed by news items describing people choosing between heating and eating while others sleep in cars.

Analysing the dollar turnover of supermarkets and other stores might show increased takings but this reflects the higher prices charged rather than selling for instance, more T bones, tomatoes or tissues.

Every shopper will declare the prices have escalated to unprecedented levels over the last eighteen months. What has caused the rising prices?

It is caused by the other type of inflation known as 'cost-push' inflation. This occurs when costs rise for producers, wholesalers, freight companies and retailers. Typical of these costs are power supplies and interest, both of which impact the whole economy and if the above businesses fail to increase their prices, they will become insolvent.

It remains unbelievable to see the Reserve Bank suggesting a possible interest rate rise to counter the forecast 'demand inflation' when in fact we are experiencing price rises caused in part by the last interest rate rises.

Until we recognise the problem of 'cost-push' inflation with policies to correct rather than cause inflation, we are doomed to suffer rampant inflation!