As almost all New Zealanders will have noticed, the cost of living continued to increase over the past 12 months.
This was confirmed in the March 2022 quarter Consumer Price Index (CPI) release that shows the cost of living increased 6.9 percent in the 12 months to 31 March 2022. This comes as food and fuel prices increase amid global pandemic disruptions and Russia’s war in Ukraine. The March 2022 result replaced the December 2021 quarter as the largest movement since a 7.6 percent annual increase in the year to the June 1990.
New Zealand’s inflation result is consistent with global experiences. Inflation rates around the world are currently higher than in recent years, with the OECD at 7.7 percent for the year ended February 2022. The United States was at 8.5 percent for the year ended March 2022, and the United Kingdom was at 7.0 percent for the same period.
Finance Minister Grant Robertson has attributed much of the nation’s increasing cost of living to global factors, which look set to continue. However the drivers are also domestic. For example low unemployment and government stimulus to counter COVID-19.
The cost of tradeable items (goods and services that are imported or are in competition with foreign goods in domestic or foreign markets) was up 8.5 percent annually. Meanwhile, the cost of non-tradable items (goods and services that face no foreign competition) was up six percent in the year to the March 2022 quarter.
Inflation has been particularly noticeable in the goods that are important to households, for example food, fuel and housing, and is being driven by both domestic and global pressures. As noted in BERL’s earlier article, the sky-high cost of living – explained, the drivers of this high level of inflation are the items that make up a large proportion of household expenses every week; rent (or mortgage repayments), food, and transport (public transport and driving).
Housing was the most significant contributor to the annual increase
Between March 2021 and March 2022 the cost of housing and household utilities increased 8.6 percent. Higher prices for construction, rental housing, and local authority rates drove this increase. The purchase of new housing was up 18 percent while the cost of rental housing increased by four percent.
The cost of food contributed to the annual increase, with food prices up 6.7 percent. The largest contributors to this were vegetables (up 24 percent) and ready-to-eat food, which was up 5.6 percent.
The cost of transport, which increased 14 percent, was the second most significant contributor to annual inflation. This was predominately due to petrol prices increasing by almost a third over the 12 month period. The price of a litre of petrol increased steadily over January and February and was up 8.8 percent from the December 2021 quarter. The average price of one litre of 91 octane, including discounts, increased 8.7 percent to $2.67 in March 2022, compared with $2.45 in December 2021. In the second week of March the average price of 91 petrol was $3.05.
The sharp increases in petrol prices forced the government to react and fuel excise duty was decreased by 25 cents per litre (28.75 cents including GST). This change is expected to remain in place for three months. The true impact of the Government’s move to temporarily cut fuel taxes won’t appear until the next quarter. However, if/when the excise is re-imposed in the future it will contribute to an increase in the CPI.
The domestic and international pressures on prices do not look set to ease in the near future. Increases in consumer prices look to be widespread. The Reserve Bank is forecasting that annual inflation will remain above the three percent upper limit of the Reserve Bank’s inflation target until the June 2023 quarter.
The pressures on prices are having a disproportionate impact on low income households. If prices continue to increase, without an equivalent increase in salaries, wages and government transfers, this pressure will continue to grow, and the decisions on where to cut spending will become more difficult. The Salvation Army is already reporting households making trade-offs and difficult decisions between filling up the car, getting fruit and vegetables, or even being able to access food.
Some relief will come from the April 1st 2022 increases to government transfers, which include the biggest lift to main benefit rates in a generation. However, these increases fail to keep up with recent inflation. Superannuation will increase by six percent and the minimum wage will increase by $1.20 per hour (also six percent), both below the level of inflation experienced.
The increases to main benefits will be welcomed and will see rates come into line with the key recommendations of the Welfare Expert Advisory Group (WEAG).
However, the rates recommended in the report are from 2019, and fail to address the inflation experienced in the intervening period. Rates for families with children will increase by an additional $15 per adult, per week, meaning these rates are now above what the WEAG recommended, but they are still less than if they had increased in line with inflation.
As the risk of a longer period of high inflation is becomes more entrenched, especially if wage and salary increases become necessary, lower income households, particularly those receiving benefit payments, superannuation or the minimum wage will continue to struggle. Inflation is likely to become an increasingly important topic and will put pressure on the government and the Reserve Bank to take further actions.