What is Inflation?

Inflation is a measure of the rate at which the general level of prices for goods and services is rising and subsequently, purchasing power is falling. In New Zealand, the Reserve Bank of New Zealand (RBNZ) monitors inflation and sets monetary policy in order to stabilize prices and maintain economic growth.

In the recent years, New Zealand's inflation rate has been relatively low, averaging around 1.5% in the past 5 years. However, it has increased slightly in 2021, due to several factors such as increased demand for goods and services following the end of the lockdown measures in response to the COVID-19 pandemic, as well as supply chain disruptions.

The RBNZ has an inflation target of 1 to 3% per year, and uses a variety of tools to try to achieve this target. One of these tools is the Official Cash Rate (OCR), which is the interest rate at which commercial banks can borrow and lend money with the RBNZ. The RBNZ can adjust the OCR in order to influence inflation. If the RBNZ wants to slow down inflation, it will raise the OCR, making borrowing more expensive and therefore reducing demand. If the RBNZ wants to increase inflation, it will lower the OCR, making borrowing cheaper and increasing demand.

Another tool the RBNZ uses to control inflation is quantitative easing (QE). This is a process in which the central bank creates new money and uses it to purchase assets such as government bonds in order to inject cash into the economy. This can stimulate spending and increase demand, which can lead to higher inflation.

Overall, New Zealand's economy has been performing well and inflation has remained relatively stable and within the RBNZ's target range. However, the country is not immune to global economic changes, and the government and the RBNZ will need to keep a close eye on inflation to ensure it stays under control and doesn't harm economic growth in the future.