Now that inflation is pretty much back to where our local reserve banks would like it to be – 2.8% in Australia, 2.2% in New Zealand – what lessons can we take from the whole unexpected episode?

If anyone had predicted five years ago that inflation across the developed world would be knocking on 10% in coming years, they’d have been laughed out of the forecasting game. But they’d have been right: across the large-country G20 group, it peaked at 9.3% in September 2022 and, for the whole OECD area, it hit 10.4%.

As the graph below shows, our neck of the woods pretty much matched what was happening everywhere else.

Some of it was genuinely unforecastable: nobody expected a pandemic; few expected Putin’s lunge at Ukraine. What is less explicable is people’s slowness to realise that fiscal policy and monetary policy both set to full speed ahead would very likely lead to serious overheating.

It could have been complacency: independent central banks had been effectively controlling pre-COVID inflation pretty much everywhere, so why would they suddenly lose the plot? Or it may be that authorities everywhere didn’t much care. They knew how things might pan out but, given the choice of undercooking the response to COVID and risking economic meltdown, the alternative risk of overcooking the inflation rate was one worth running.

So there’s lesson one for the future: better coordination of fiscal and monetary policy.

In principle, it’s happening already – the modellers in treasuries and central banks each try to allow for the impact of the other guys – but it hasn’t worked as well as it might. And future coordination needs to take on board that fiscal policy – pre-COVID, regarded as monetary policy’s poor cousin when it came to managing the economic cycle – has turned out to be surprisingly more effective than previously thought (for example through the quick and massive deployment of employment subsidy schemes).

Is the risk of inflation always present?

Lesson two: inflation may have run amok in the COVID era, but even in more normal times the potential for inflation is not dead, it merely sleeps.

Inflation may have looked permanently beaten – pre-pandemic, the central banks had been more worried about inflation being too low than too high – but was it?

Have a look at the chart on the right. It shows the rate of non-tradables inflation in Australia and New Zealand in recent years, ‘non-tradables’ meaning goods and services not exposed (or only very slightly) to potential imports. School fees, home insurance, the bills from the GP and the vet – they’re all non-tradables. Essentially you’re looking at domestically sourced inflation pressures that have little to do with world energy prices or the Ukraine wheat harvest.

What it shows is that homegrown inflation can flare up a lot quicker and stronger than you might have thought possible, getting up to around the 7% mark in both countries in 2023 from a standing start of around 3% in 2021.

Both countries had little spare capacity at the end of 2021: the unemployment rate was a low 4.2% in Australia and an even lower 3.2% in New Zealand. If you were sitting in Michele Bullock’s chair, or Adrian Orr’s, one lesson you’d take away is that there’s a feistier inflation response to the economy hitting capacity constraints than the low inflation of the earlier 2000s might have led you to believe.

The importance of quality inflation data

Lesson three: why oh why do we not have the economic statistics we need, before the latest crisis hits?

We’ve been blindsided twice now in recent years, once by COVID – when we discovered that timely official data on the business cycle wasn’t adequate – and again when inflation erupted and we didn’t have the quality of inflation data that other countries had. Specifically, Australia and New Zealand had quarterly numbers, whereas the norm in other well-off countries is monthly.

Both countries have come up with stopgaps, with an unofficial but pretty decent monthly inflation series in Australia and a monthly release of some components of the CPI in New Zealand. That’s something, but wouldn’t it be nice if someone took a stocktake of the state of our statistical infrastructure before our next lurch into ignorance when something goes dramatically awry?

Transparency around monetary policy

Lesson four: upping our monetary policy.

To give them their due, our reserve banks – like their overseas counterparts – have got inflation back roughly to where it needs to be. But that’s not to say everything’s rosy in how they go about their job.

At the RBA, the recent recommendation to hive off a specialist monetary policy committee may have run into political flak but it’s the right one. At the RBNZ, the equivalent committee is finally getting appointees who know more about macroeconomics than their predecessors, though the process is still unhealthily dominated by reserve bank officials (they have an inbuilt 4:3 majority).

Bizarrely, neither in Sydney nor in Wellington are the views of individual members transparent.

At the Fed in the US or at the Bank of England in the UK, who voted for what is routinely disclosed: the sky does not fall, nobody dies. Individual members regularly speak out on how they see the choices in front of them. That’s as it should be. We’ve elected to give this important job to people who we think will get it right (or at least righter than opportunistic politicians). I don’t recall that we gave them an accountability-free licence to hide in the shadows: do you?