Why Everything is More Expensive Now

Why Everything is More Expensive Now

From paying 50 cents more for a coffee or quite a bit more on council rates, it seems we’re starting to see prices rise. But why now, and what’s being done about it?

In the latest quarterly report released in June 2023, Stats NZ announced that the Consumer Price Index is at 7.3%, marking New Zealand’s highest rate of inflation in decades. This increase is due to a combination of factors both inside and outside of New Zealand. Let’s get into it.

Though things may seem like business as usual in some ways, countries around the world, including New Zealand, are still feeling the effects of the massive disruptions caused by the COVID-19 pandemic. Plus, the ongoing conflict in Ukraine has only made things worse. Essentially, because people, businesses and entire countries closed down while we waited for vaccines, there’s now less stuff, and it’s more expensive to make it and move it around the world.

As people in countries like New Zealand began heading back to work and buying things again, there are now more people who want and need the same stuff. So the prices go up again.

More demand plus scarcity means that energy is also more expensive now, so everything from transportation, freight, manufacturing, heating and even just turning on the lights costs a little more.

The New Zealand government has been working through strategies to help keep businesses and families afloat, like billions of dollars invested into supporting businesses affected by COVID-19 and the more recent cost of living adjustments to help Kiwis keep up with inflation, but there is no easy answer to it all. The government is working with the Reserve Bank of New Zealand to gradually make adjustments to help to cool inflation and bring it down to more manageable levels.

What exactly is inflation?

First, it’s important to understand what inflation is and how it affects the economy. Inflation is the rate at which prices for goods and services rise over time. When inflation is high, people and businesses need to spend more money to purchase the same things they used to be able to buy for less. While inflation can initially result in more spending, it can lead to reduced spending in the long term, as people and businesses are less likely to invest in new projects or make big purchases.

In New Zealand, we use the Consumers Price Index (CPI) to measure inflation. The CPI tracks the rate at which prices change for goods and services purchased by New Zealand households and is published four times a year.

What is New Zealand doing to combat inflation?

To combat inflation, the government and Reserve Bank have been working on a number of strategies. One key tool they have at their disposal is the Official Cash Rate (OCR). The OCR is the interest rate that banks pay to borrow money from the Reserve Bank, and it has a big impact on the overall level of spending in the economy. When the OCR is high, it becomes more expensive for businesses and consumers to borrow money, which can help to slow down spending and reduce inflation.

Since 2021, the Reserve Bank has been gradually raising the OCR in an effort to curb inflation, but it can take time for changes to take effect. The OCR currently stands at 5.5%.

“Higher interest rates reduce demand by encouraging people to spend less and save more while lower interest rates have the opposite effect. Higher interest rates push economic activity into the future whereas lower interest rates pull activity into the present. “

The Path Back to Low Inflation in New Zealand, Paul Conway, March 2023

The government has a number of tools at its disposal to reduce inflation, but it’s a careful balancing act of push-pull systems. As inflation grows, people risk getting left behind. The recent wage adjustments helped many households to stay afloat but this change also had knock-on effects on inflation. For the time being, increasing taxes has not been one of the strategies used, though that may not be the case for long.

While not appropriate for everyone, as prices increase, Kiwis are being encouraged to find ways to reduce their outgoings where they can. Honing the skills to help reduce spending could be a strategy for households finding themselves paying more at the checkout or in their PAYE.

RBNZ’s long-term goal is to get inflation down from 7.3% to 1-3%. We still have a long way to go before we reach that. With the economy currently in a state of active change, it is unclear whether we will continue to see inflation rise or finally witness a welcome reduction in the coming year.

Is there anything you can do to help?

Kiwis can also take steps to reduce their own spending and help to curb inflation. One important strategy is to be more mindful of your purchases and try to buy only what you really need. This can help to reduce overall demand for goods and services and put less pressure on prices. Additionally, you can look for ways to save money on everyday expenses, like cutting back on dining out or finding more economical swaps for the products you use regularly.

To end on a positive note, NZ Treasury expects inflation to come down to 3.3% in 2024, so hopefully, we can practice being a bit more frugal until then.