With consumer prices running rampant, Reserve Bank may need to discuss 'shifting inflation goalposts' - Cameron Bagrie

The Reserve Bank (RBNZ) may have to discuss modifying its 1-3 percent inflation target amid higher consumer prices in the post-COVID era, prominent economist Cameron Bagrie says.

Bagrie said there could be a discussion about that target within the next couple of years.

"You start to wonder… when push comes to shove, as those economic costs of taming inflation start to sink in, whether we sit back and think about, 'Maybe there's an easier solution here; it's shifting the inflation goalposts.'

"On some levels, I'm thinking that's not the right decision but in a world of supply shock after supply shock, you wonder whether a 1-3 percent inflation target is actually the right target," Bagrie told AM.

New Zealand's inflation target came about more than three decades ago when the country's consumer price growth was in double figures.

Former Finance Minister Roger Douglas has previously told Reuters "I just announced [the target] was gonna be 2 percent, and it sort of stuck". That target, to this day, is used around the world. 

In New Zealand, the so-called "inflation goalposts" have shifted twice since the 2 percent target was introduced in 1990, initially to 0-3 percent. The current 1-3 percent range has been in place since 2002.

"Two percent inflation, I think, is going to be a lot more difficult to achieve than what we've seen over the past 30 years," Bagrie said. "Why? Because… it's no longer that low inflation environment we've been used to," he said, pointing to costs associated with climate change and a shift away from globalisation.

Bagrie said central banks around the world would have more tough decisions to make in the near future.

"The challenge for central banks is, how do you shift this? You can't shift the inflation goalposts when you've got inflation at 7," he said, referring to New Zealand's 7.2 percent annual inflation.

"Maybe you can shift the inflation goalposts when you've got inflation back down to 4."