Why is everything getting more expensive in NZ?

Why is everything getting more expensive?

NZ’s soaring cost of living

We’ve all probably noticed record high petrol prices, more expensive groceries, and a range of other price hikes. The general increase in prices is called inflation. NZ’s official inflation rate just soared to its highest level since 1987 (excluding tax increases) of 4.9 percent.

What is inflation?

The rate at which prices are rising is referred to as inflation. If the cost of a one-dollar bottle of milk rises by five cents, then milk inflation is five percent.

This applies to services too, like having a haircut or getting your car cleaned.

We may not notice low levels of inflation from month to month, or even year to year, but in the long term, these price rises can have a big impact on how much you can buy with your money.

Over the last decade inflation has been consistently in the bottom half of the governments one- to-three percent target band and consistently lower than the Reserve Bank’s forecasts, Treasury’s forecasts, and the rest of the bank economists’ forecasts.

How is NZ inflation measured?

The official number is determined by Statistics NZ selecting a typical fixed 'basket' of consumer goods and services, such as food, utilities such as power bills, education, transport, clothing, and so on. Some households will be harder hit by price hikes in some areas, such as petrol, while other households might be less impacted.

This gives rise to the claim that the official inflation rate is lower than the real increase in the cost of living.

Why are goods and services becoming more expensive?

A good summary of this is provided by Nick Mowbray, billionaire co-founder of NZ company Zuru:

“NZ has accumulated as much national debt in the last 18 months as it has added in TOTAL over our entire history.

We have doubled our national debt in 18 short months.

Why does that matter?

When you pump 60 billion dollars (20% of our GDP) into an economy with no productivity/supply attached to those printed dollars you drive artificial GDP growth, demand and increased tax revenue for a short period. But the downside is rampant out of control inflation which can cause havoc on the economy in the coming years and drive immense inequality…

More concerning is our CPI does not even truly reflect just how rampant inflation is. The fact we forget housing in our calculation of inflation makes no sense.

With interest rates going up, costs soaring, house prices soaring and the taps being turned-off, the bite is going to come and likely come fast.”

What else has made things more expensive?

In addition to above, several other factors also come into play.

Tax is one of them. There’s no doubt that us Kiwis are well-taxed, even compared with our closest neighbour. A person earning $40,000 a year pays 45 percent more income tax in NZ than Australia. On $70,000 you are paying 11 percent more here than Australia and on $200,000 you are paying 13 percent more here than Australia. (This, and spiking prices, has led some to suggest that many young and mobile Kiwis may move to Australia when borders reopen). A range of NZ taxes have risen or been introduced over recent years, including:

  • Higher fuel tax
  • New top income tax rate
  • New Auckland regional fuel tax
  • Visitor tax
  • Higher road user charges
  • Landfill tax
  • Five-to-ten-year capital gains tax on real estate (bright line test)
  • Ringfenced rental losses
  • Tobacco tax

Though some of the taxes above might seem irrelevant, these can be the most hard-hitting to all our back pockets. For instance:

  • Road user charges are what diesel vehicles pay to use the roads, and as there’s no viable alternative to diesel-powered trucks (yet), taxes such as this can’t be avoided by transport companies. These are the same transport companies who deliver goods to supermarkets, building supplies to building sites, stock to shops, and so on. That means higher costs of transportation are passed on in the form of increased prices at supermarkets, for new homes, in shops, and so forth
  • Taxes hitting landlords are often recouped by increased rents

It’s not just NZ

It might be some comfort that higher prices aren’t just a NZ phenomenon. Covid and ongoing technological change have led to all sorts of ongoing disruption.

Jarden economist and strategist John Carran recently commented it was apparent rising oil prices, clogged supply chains and surging housing activity were largely behind the rise in inflation. Carran believes global supply issues were set to continue for some time yet and that, as most countries have relaxed Covid-19 restrictions, global demand for goods would continue to be robust.

Shipping corporates are focused on the most profitable routes, and NZ’s location at the bottom of the world means we can be an afterthought, which drives up shipping costs, passed on in the form of higher prices for imported items. Even then, NZ’s closest allies are experiencing similar issues:

  • US inflation is at a 30-year high of 4.4 percent
  • Canadian inflation hit an 18-year high, also of 4.4 percent
  • Australian ‘core’ inflation is low by comparison at 2.1 percent, though that’s still the highest it’s been since 2016

Money printing and inflation

As Nick Mowbray identified above, NZ and most other countries, printed a lot of money in response to Covid-19. In short, there is now too much money chasing too few goods.

Even before Covid hit, our own Reserve Bank warned that money printing would push up house prices and deepen inequality, which some commentators have suggested was like pouring $53 billion of petrol on a bonfire. The same logic applies to the cost of other assets too.

Who cares about inflation?

The inflation rate is used by companies and organisations to decide a range of matters, such as how to price their goods and services.

The inflation rate is also used by government departments to decide certain things, such as how much retirees should be paid for their NZ Superannuation (“the pension”).

It's also keenly watched by economists. They see inflation as a sign of what's going on in the economy.

A bit of inflation is usually considered to be a good sign. If prices were falling, then people might delay buying non-essential items in the hope of getting them cheaper.

But, if prices are rising too sharply, it's seen as a sign that the economy is running into difficulties.

Obviously, everyday Kiwi’s should care about inflation too! When the costs of the usual supermarket shop and tank of petrol goes up, that impacts us all.

Will things get even more expensive?

In NZ we’re already seeing interest rates lift to help keep a lid on inflation. Most experts worldwide, and in NZ, think that the pickup in inflation might just be a temporary trend which should resolve itself in six to 12 months. Only time will tell whether this is accurate or not.