February 16, 2021

Inflation and wellbeing

Who is most harmed, and who is least?

While we can’t possibly understand how inflation affects all the different individuals in New Zealand differently, with a bit of hand waving, we can examine how inflation affects different groups of people .

To help with this, Statistics New Zealand have produced the December 2020 quarter Household Living Costs Price Indices. These indices mirror the more widely known Consumer Price Index but are calculated for different household types.

Below we plot the average rate of price inflation for each household type. The chart clearly shows that the “beneficiary” household type suffers the worst price inflation (1.9 percent) while the Expenditure quintile 5 (high) household enjoys the lowest (0 percent).

Source: Statistics New Zealand

The difference in these values comes from the different weightings of goods and services purchased by these households.

When we examine expenditure weights of the beneficiary household group versus those of the high expenditure quintile group we can elucidate their spending patterns.

The top five things the beneficiary group spends income on are: rent, household energy, grocery food, cigarettes and tobacco, and private transport supplies (petrol, oil, etc).

Contrast to the high expenditure quintile group: interest, insurance, private transport supplies, restaurant meals, and vehicles.

The two groups differ in the proportions of their income spent on different goods. The survey data shows that the beneficiary household type spends almost 30 percent of their income on rent. While the high expenditure quintile spends around nine percent of their income on interest payments.

This is largely a function of the difference in income of the two groups.

For the beneficiary household the changes in their top five consumer goods are as follows: rent has increased by just over three percent, household energy is up by 0.46 percent, grocery food by 0.89 percent, cigarettes and tobacco are up over 11 percent, finally, private transport supplies are down 8.6 percent .

Source: Statistics New Zealand

The largest component of the high expenditure group’s expenses is interest. Inflation is all about pushing interest rates down, this is a boon for the high expenditure group (who likely owns their own house as well as one or several rental properties). This group has enjoyed an 11.8 percent decrease in their interest index from 2019 to 2020. Insurance for this group has increased 1.68 percent, private transport supplies are down 7.67 percent, restaurant meals are up 3.79 percent, and vehicles are up an average of 3.32 percent.

Source: Statistics New Zealand

While it is not in either of their top five expenditure items, beneficiaries have endured an increase of 11.7 percent in the price of passenger transport. While the high expenditure group have enjoyed a 2.3 percent decrease in the price of this good.

Overall, what the Household Living Cost Indices reveal is that the group least able to absorb shocks is the group worst affected by inflation. This group has a fixed income (in the form of financial support offered by the Ministry of Social Development). While the group that is perhaps most easily able to absorb shocks is the least affected. This second group has no such fixed income.

This difference is attributable to the types of goods these groups spend most of their income on. Beneficiaries spend a large portion on rent, while the high expenditure group spend a decent chunk on interest. This indicates the high expenditure group probably owns their own house, as well as one or several real estate investments.

The deleterious effect of price inflation on beneficiaries is not directly the result of the response to COVID-19. However, other BERL research has shown that the response to COVID-19 also affected this group (and other similar groups, in terms of income and education) most harshly.