Why rising prices are good news

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By Liam Dann

Prices have been rising and this is good news for the economy - even though it might not feel like it down in the supermarket aisles.

The consumer price index for the first quarter showed annual inflation has now hit 2.2 per cent.

That's the highest the key economic indicator has been since December 2011 and the first time it's topped the Reserve Bank's mid point target (of 2 per cent) in that time.

Nobody likes paying more for things so consumers could be forgiven for wondering why this is cause for celebration.

The short answer is that it suggest that more normal economic conditions have returned.

As the global economy improves it looks like we've finally shaken off the threat of deflation.

Most of us can also remember a time when inflation was the economy's public enemy number one.

That's why most central bank's have make inflation control their primary function. And most target a band of between 1 and 3 per cent.

Once inflation takes off it is very difficult to curb. Rapidly rising prices require wage hikes and an inflationary spiral takes hold, devaluing money and people's savings.

But since the global financial crisis deflation has been the bigger risk.

Continued below.

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That's a scenario where ever decreasing prices prompt consumers and businesses to delay spending. That causes economic contraction and a downward spiral that can become recessionary and cost jobs.

The oil price slump has played a big role. It has also been noted that there has been a structural shift with technological progress making consumer goods and now (thanks to the likes of Uber) services cheaper.

So for a while it was feared that inflation might be gone for good.

In New Zealand annual inflation figures went as low as 0.1 per cent for the year to December 2015.

So the bounce back is being greeted with relief as much as anything.

The latest figure was exaggerated a bit by a first quarter full of one-off factors like the rain which hit vegetable growers and pushed prices up, a spike in the oil price and a tax hike on tobacco products.

Nobody is expecting the inflation rate to keep rising and it won't yet be pushing the Reserve Bank towards lifting the official cash rate.

But, as the Kiwibank economics team notes, there were also "signs of underlying price pressure coming through on the domestic front, with nine of the 11 subgroups experiencing positive price gains.

Deflation looks beat and the next official rate move is looking a lot likely to be up.

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