GDP and Inflation

Housing costs driving inflation

Tuesday July 31, 2018 Sam Green

The latest inflation figures presented by Statistics New Zealand last week showed the general price level in New Zealand has risen by 1.5 percent over the past 12 months. 


As inflation is calculated using the prices of a basket of goods and services, while average prices have risen 1.5 percent, some individual items or groups of items can change significantly, becoming relatively cheaper or more expensive.


The group with the largest growth in prices is the alcoholic beverages and tobacco, driven largely by ongoing increases in taxes on cigarettes, as mentioned in a recent article by Mark Cox.


In terms of the impact on overall household spending, the biggest contributor to inflation this year has been costs associated with housing.  These price changes are going to affect most households, as the price of new housing and the price of rentals have both increased. Owners of existing homes will also see an increase in housing costs, with increases in property maintenance (4 percent), rates payments (3.5 percent) and household energy (2.8 percent).  Further compounding the price rises for home owners is the substantial rise in home insurance (miscellaneous group) increasing 18 percent over the past year.


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While there are relatively large increases in housing related costs, the overall growth of 1.5 percent means there are also some areas that are getting relatively cheaper.


Advancing technology is resulting in the continued reduction in costs of communication, in terms of telecommunication equipment, telecommunication services and computing equipment all reducing in price over the past year. More traditional methods of communication, including the postal service, are the only subgroup to buck this trend, with small increases in prices.  


Unsurprisingly, the education group has also seen a major decrease in prices, though this change will not be seen by most households. The only type of education with a cost decrease is tertiary education, 16 percent cheaper than a year ago, with the first year free policy coming into effect this year.


While the magnitude of these decreases are significant, the biggest downward contributor to inflation is hidden within the food group which will excite the healthy eaters among us. While food prices have increased slightly, the price of fresh vegetables has fallen ten percent, the largest downward contributor to inflation over the last year.