What is inflation in NZ

In the words of Aotearoa New Zealand’s Reserve Bank, “Inflation is a term used to describe a rise of average prices across an economy. It means that money is losing its value.”

In other words, inflation is when everything gets more expensive and you’re able to buy less stuff. This can make life a bit harder - for some, it may mean that it’s hard to make ends meet, for others it may mean cutting back on luxuries like travel.

Inflation is measured by assessing the change in a basket of goods and services that may be purchased by an average New Zealand household. The percentage change in the price of this basket of goods is known as Consumer Price Index inflation, and is reported on by Stats NZ quarterly and annually.

Apart from making everything more expensive, inflation has a number of negative effects:

• Inflation can reduce the value of investments. For example, if inflation is at 7% and your investment is returning 6% a year, the value of your money will still be decreasing by 1% per annum. No bueno for future you.

• If inflation sticks around for too long it can discourage long term investment in businesses, which can decrease productivity.

• High inflation may go hand in hand with high interest rates. That’s because the Reserve Bank uses high interest rates to reduce people’s disposable income, which decreases demand in the economy and thus reduces inflation.

Inflation is bad for people but it’s also bad for the economy. It can deepen booms and busts and periods of high inflation are often followed by recession. For that reason the Reserve Bank uses monetary policy and the OCR to keep inflation between 1-3%.

There are generally two causes of inflation: demand-pull and cost-pull. Cost-pull inflation happens when there’s an increase in the cost of producing goods and services. This could be due to an increase in the cost of raw materials, like oil or precious metals, or because of an increase in the cost of labour.

Demand-pull inflation happens when there’s a strong consumer demand for a product or service. If this demand continues the supply of the goods and services become harder to get, and as a result consumers are willing to pay more.

Inflation was at 5.6% during the year to October 2023, according to Statistics NZ, but it was much higher earlier in the year. In March 2023 inflation was at 6.7% and in late 2022 it was above 7%.

This was driven by a number of factors, including rising housing costs, increasing petrol costs, labour shortages and rising food costs.