Contrary to historical trends, cost increases have been about the same magnitude for all households in recent quarters. This likely reflects the fact that inflation has been very broad-based – the only component of the CPI that did not rise in Q3 was communications (just under 3% of the total basket).
On average, households have seen the cost of living increase by 4.0% in the year to September 2021. This is obviously lower than the CPI print of 4.9% in the third quarter and reflects how the IPHL is constructed slightly differently. For example, interest payments are not included in the CPI and given recent OCR cuts have been at a very low level recently. But the manna of extremely low interest rates is over. The RBNZ has now hiked interest rates twice, with ANZ Research forecasting further moves to come in a bid to tackle soaring inflation. But don’t expect cost pressures to moderate on a yearly basis through 2022 – the inflation dragon is well and truly awake.
On paper, it looks like everyone is currently suffering from the same high inflation. But digging into the details, it is clear that for the poorest households, high inflation is particularly difficult to manage.
Rising prices of basic necessities difficult for poor households
The main drivers of high inflation in recent quarters have been housing, transport and food. Of the 2.2% increase in consumer prices in the September 2021 quarter, 0.7 percentage points came from housing (e.g. rents, construction costs, municipal rates), 0. 5 percentage point came from food and transportation added 0.5 percentage point – with 60% of that from gasoline alone.
These are all essential items – and this makes it harder for poorer households to absorb price increases since a greater share of their expenditure is on essential goods and services.
It’s easier for higher-income households to cope with price increases because they can simply cut back on more discretionary spending, like not eating out as much at restaurants. For a poor household whose budget can barely cover the essentials even when inflation is low, the choice quickly becomes: do I have lunch this week or do I pay the rent?