It is usual in an economy for low inflation to be driven by weak demand, a large output gap and downward pressure on prices. However in the New Zealand economy it feels like a supply side expansion including:
- technological change,
- buoyant competition, and
- global disinflationary
- lower oil prices.
But lower inflation expectations is also significant. This suggests that the New Zealand economy is operating inside the previously prevailing Phillips’ Curve – see graph from BNZ. Therefore either inflation is lower than the given level of unemployment or unemployment is currently lower than the given the current level of inflation.
Low inflation with relatively low unemployment is still a strong position to be in and is better than stagflation – high inflation and high unemployment.