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What is CPI and why is it rising?

Every three months Statistics New Zealand gather over 100,000 prices for 649 individual items and services which go to make up the Consumers Price Index (CPI). These include things like our food, cars, petrol, council rates, electricity, rents, the cost of building a new house, haircuts and so on. The change in the average price from one survey period to another is called inflation and we use that as a broad gauge of the change in our cost of living.


The inflation rate in New Zealand is currently 7.2% and because that follows 4.9% inflation a year earlier, we can say this. The average cost of living for a typical NZ household has risen by close to 12.5% in the past two years – more if we include higher interest rates for the one-third of households who have mortgages.


A lot of the blame for this surge in inflation/living costs can be put down to the Russian invasion of Ukraine pushing up prices for many goods traded internationally including food and energy like oil. Climate change and simple bad weather also partly account for higher food prices from destroyed crops.


But we also have the likes of shortages of airline capacity and a surge in “revenge” travel causing domestic NZ airfares to be 32% above pre-pandemic levels while international airfares are up by 72%.


We also have a near record low unemployment rate of 3.3% contributing to extra upward pressure on wages, with the main wages measure we economists follow ahead by 8.6% in the past year, 3.6% the year before, bringing a 12.5% rise over two years. This exactly matches the rise in the cost of living.


Climate change helps account for much higher insurance premiums while supply chain problems stemming from China’s continuing eradication strategy for handling Covid have pushed up input costs for businesses around the world.


Into this picture we have to add the lagged effect of our central bank and others keeping interest rates too low for too long over 2021-22 generating the very thing which ultra-low interest rates are aimed at achieving – higher inflation.


Is New Zealand headed for the likes of the 11.1% inflation rate just reported in the United Kingdom? No. There and in many other countries the high dependency on coal and gas for home heating and electricity generation gives a surge in costs we are not seeing to remotely the same degree here.


Instead, we can see a deep crunch in some areas of household spending underway which history tells us will eventually cause the inflation rate to ease. Global shipping costs are falling, the pace of growth in rents is slowing due to weak population growth recently and a surge in new house supply. Rising airline capacity will eventually bring lower airfares, and as stocks of unsold products start to pile up in the wholesaling and retailing sectors, we can expect some price discounting soon in order to reduce inventories becoming increasingly expensive to maintain as business overdraft rates climb higher.


There is a long way to go, and no-one has a good record in forecasting inflation over recent years. But it does increasingly look like a year from now we are likely to be seeing inflation close to if not below 4% from over 7% at the moment.


This article, provided by Fidelity Life, was prepared by Tony Alexander who is an independent economist. The opinions expressed in this article are his own and may not reflect the views of Fidelity Life or Connect and Grow Limited. Tony produces a free weekly publication called “Tony’s View”, available for signup at www.tonyalexander.nz.



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