5c and inflation

In her HOS column, Deborah Coddington blames Allan Bollard for contributing to inflation by getting rid of the 5c piece. Now I’m not a huge fan of how Dr Bollard has handled inflation (he has let it get far too high) but on this issue I will defend him.

Let’s look at the worse case scenario. Every single transaction is in cash, and every single transaction has had its cost rounded up by 5c. Now if the average transaction is $50.00 then that 5c increase would contribute a maximum 0.1% to inflation. I suspect it is closer to 0.01% when you consider many transactions are not cash and some are rounded down.

Further on Coddington cites the week before Christmas with “electronic transactions were up 21 per cent on 2005, worth more than $200 million, we start to get some idea of how much extra money we’re handing over, just because Dr Bollard took the 5c piece out and shot it.”

Umm, if they were electronic transactions then the demise of the 5c piece, by definition, doesn’t affect the price. You don’t hand over a single cent extra – the exact amount is electronically charged.

Likewise this is the answer to Coddington’s next question: “If I’m not allowed to hand over 5c when I’m paying by cash, how come the retailers are allowed to charge 5c?”. The answer is because the majority of transactions are not in cash, and the electronic transactions are precise to the cent.

And hating to pick on the one column, but I also have to disagree with her conclusion of profiteering because a BP station states GST was 1c higher than it really was. The receipt claimed GST of $5.24 on a $47.10 transaction and Coddington is correct it should be $5.23(3333…).

I have no idea why the BP station slightly inflates the GST content on their receipts, but at the end of the day it won’t affect any profits. You see their prices are GST inclusive and regardless of what their individual receipts say, their GST liability to the Government will be calculated by dividing their total sales income by nine. Incorrect rounding on an individual receipt won’t affect this.

Now if BP prices it petrol GST exclusive and it then added GST on top, then the one cent difference could be material – in that it overcharged you by one cent. But because the pricing is GST inclusive, its a non material error.

Finally though I am pleased to say there is one area where Deborah has correctly identified a problem. At the end of the article she states “ratcheting up interest rates to try to curb household spending is a stupid exercise when most people have fixed mortgages.”

This is indeed a problem, with both John Key and Michael Cullen concurring on it. The solution is yet to be found.