Do The Rich Remain Unfazed By Inflation?

Wednesday, 10 August 2022, 6:13 am
Press Release: Kalkine

Summary

• Inflation is at its peak in New Zealand and elsewhere and respective central banks have adopted measures to control it.
• The world’s richest 500 people have lost so much wealth in H12022 that it dwarfs even the annual GDP of New Zealand.
• The recent upsurge in the number of units sold by Ferrari might prompt a debate over the impact of inflation on rich.

With inflation touching a record-high in most economies—developed and developing—people have shifted their focus from the Covid-19 pandemic to inflation.

Central banks have responded similarly by raising interest rates and reducing the money supply in the economy in the wake of decade-high inflation, be it the US Fed or the Reserve Bank of Australia or the Reserve Bank of New Zealand. Gone are the days when central bank chiefs termed inflation "transitory".

Everything

has become costlier for the common man, from food to fuel to input costs. But the question amid the broader debate on inflation is whether price rise bites every consumer with the same intensity. Let us explore.

New Zealand and inflation

‘Higher than expected’ seems to have become the favourite term with regard to inflation figures. Statistics New Zealand, commonly dubbed Stats NZ, recently announced that inflation hit 7.3% in the quarter ended 30 June 2022. The figure was higher than that of major banks forecasted, including the Reserve Bank of New Zealand (RBNZ). Housing costs, food and energy expenses have surged, taking price growth to its highest since 1990.

A weaker-than-expected economic recovery after pandemic times is another area of concern. New Zealand’s economy, one of the most advanced in the world, contracted in the first quarter of this year, which has reignited the debate over the rationality behind continuous rate hikes by the RBNZ.

As far as inflation is concerned, housing and household utilities were the primary drivers in the June quarter. Building a house has become costlier for Kiwis, and the second-biggest contributor to inflation--transport--is continuing to trouble in the wake of geopolitical tensions and supply chain concerns. The government is attempting to provide some cushioning by introducing half-price public transport and reducing road user charges.

Also read: Housing imbalances & inflation causes of worry in NZ, says IMF

Are the rich troubled?

By one measure, the world’s wealthiest individuals have so far had a bad year in 2022.

Consider this. According to an estimate, the fortune of the wealthiest 500 people reduced by US$1.4 trillion over the first half of 2022. Graeme Hart -- the wealthiest New Zealander and the only person representing his country in the top 500 richest people -- has lost millions of dollars this year. The richest people on earth, including Elon Musk and Jeff Bezos, have lost billions. But are the rich worried? Is inflation a concern for them as well?

Luxury car maker Ferrari recently reported its best quarter in terms of sales, which gives some insights into what is happening on the other side of the world. Other luxury supercar makers, including Lamborghini, are also reporting high profits, thanks to the appetite of the rich for trophy vehicles. Elon Musk -- the CEO of Tesla, which is reducing its labour force by 10% -- will reportedly have a new Gulfstream private jet by next year, the cost of which is more than US$70 million.

Also read: Unemployment rises slightly to 3.3% in New Zealand

Is inflation not for the rich?

There is arguably no accurate answer to this question. Ferrari’s sales volume is on a higher trajectory even as the common people are hunting for advice on how to save money during inflationary phases. But at the same time, even the rich are losing wealth. The US$1.4-trillion figure cited above is many times more than the annual Gross Domestic Product (GDP) of New Zealand.

One argument is that the rich are usually businesspersons who, unlike the salaried class, can shift the burden of inflation on the end consumer. But a conflicting argument is that inflation usually slows down the economy, which puts brakes on the ability of businesses to earn revenue. However, due to their ownership of income-generating assets like property, the rich generate more income during an inflationary phase.

From the sales volume of luxury cars during phases of macroeconomic downturns to the sale of superyachts, one can cite many data sets. The debate, however, on whether the rich are impacted by inflation might always remain inconclusive.

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