Economist says inflation increasing the gap between the wealthy and the poor

The AM Show 16/11/2021

WATCH: As the government continues to boast about good economic numbers, economist Cameron Bagrie says those without wealth are getting the pointy end of the stick.

Asset prices have increased close to $800 billion in just two years - the main cause (you guessed it) the housing crisis.

Not only that, but it's looking likely to continue to grow at the same rate.

"By any benchmark, that is absolutely off the charts. You're talking numbers here that are around two times the size of GDP or the general economy." said economist Cameron Bagrie on The AM Show this morning.

Low interest rates have padded the wallets of asset owners causing them to want to spend more - the roll on effect in creating a short term boost to the overall economy and "has been a pretty big part of getting the New Zealand economy back on track" Bagrie said this morning.

"The worry is that… the massive dichotomy between the haves and the have-nots. We've got what's called the K-shaped recovery. Some parts of society, if you've been on that property or asset price ladder, you've benefited tremendously from low interest rates and asset prices moving up."

The K shape means that those at the top will keep seeing a rise in asset wealth while those at the bottom face declining wealth due to rising costs as we see more spending and job creation.

"Inflation is the thief that's turned up at our doorstep. It's stealing people's money, it's making people worse off. We need to rein in inflation. How do you rein in inflation? You force interest rates up," said Bagrie.

"Central banks are going to be facing a real tightrope balancing act going forward - you can't afford to crush asset prices because you'll crush the economy, but you need to go hard on the interest rate front to slow the economy sufficiently to get inflation back down, because otherwise inflation is going to hurt middle- to low-income families across New Zealand." 

Bagrie says asset owners can take a small hit in the form of interest which will in the long run deter further economic inflation, reducing economic wage gaps between the have and have-nots.

"A portion of New Zealand is sitting on an $800 billion asset price gain in the last two years - if asset prices go back by 10 percent it's a bit of a drop in the bucket. 

"I think in the next 12 to 24 months there is a massive amount of pent-up demand courtesy of what we call the wealth effect that is going to continue to support the New Zealand economy over the next 12-24 months. That's going to be pretty hard for the Reserve Bank to rein in… to get inflation pressures down."

As the wealth gap continues to grow with asset price inflation the government will likely have to step in for low and middle income households as cost of living continues to go up.

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