Money and inflation
For most of the 19th and 20th centuries movements in prices in New Zealand reflected, or were an adaptation to, world trends. Until the mid-1890s there were many years of falling prices. Prices fell by 11% in 1870.
In contrast the 20th century was a century of inflation, though with two major interruptions – the early 1920s and early 1930s depressions, when prices fell by around 10% in some years.
The difference between the 19th and 20th centuries is partly explained by the fact that prices are affected by money supply. When the volume of money is limited, but available goods and services increase, prices tend to fall. Conversely when the quantity of money increases, prices tend to rise.
For much of the 19th century the government tied the volume of money in circulation to the amount of gold in circulation (known as the gold standard). Increases in gold did not keep pace with the increase of goods and services, and this led to price falls.
But in the 20th century governments often financed their own activities, or maintained levels of national economic activity, by creating more money – which caused price rises. This was especially the case during the two world wars.
After the Second World War the United States dollar was the most influential world currency. From the early 1960s the US financed its trade deficit by printing more dollars. This raised prices in many economies, including New Zealand’s.
1970s and 1980s inflation
A massive oil price increase in 1973–74 further exacerbated inflation in New Zealand. But the persistence of inflation into the late 1980s was primarily because of policies that allowed more money to be made available, so the overall level of prices rose. Between 1971 and 1988 inflation fell below 10% in only 4 out of 17 years, and exceeded 15% in 5 years.
