Friday, 21 May 2010

Do people understand inflation?

Over at the Standard I see that Eddie is quoting as saying David Cunliffe as saying,
The government says that most people would be better off after taking into account the GST rise and the income tax cuts. Their calculator uses the estimate of 2.02 percent inflation arising from GST alone.
This seem odd since an increase in GST has no effect on inflation at all. The GST increase will increase the price level but will do so instantaneously which, by definition, isn't inflation. I would have thought that someone, like David Cunliffe or Eddie, claiming to be an expert on the economy would have known this econ 101 type point and corrected such an error.


Mark Hubbard said...

Because Cunliffe is an economic illiterate, Paul:

Ed Snack said...

Why is an instantaneous price increase not inflation ? Surely a 100% petrol price increase applied instantly would inflationary, even if it resulted from a tax change rather than a raw material price change ?

I guess even if technically incorrect, the GST change looks just like an inflationary change, prices go up across the board for non-GST claiming consumers. It looks like inflation, feels like inflation, even smells inflationary, sure as hell FEELS like inflation to most people.