The cost of living is still rising, albeit at a slower rate
Minister of Finance Nicola Willis, stated in her first official pre-Budget speech that the government’s first Budget will make progress on various fronts, including the short-term challenges with cost-of-living relief.
The cost of living was a central focus of economic discussions before the general election and remains a primary concern for many households, including whānau, couples and single people — a significant portion of whom are employed.
The ongoing challenges of the cost of living are driving more Kiwis into difficult circumstances.
However, Nicola Willis emphasised that the Budget "won’t be an instant fix," highlighting that it would not be a big-spending Budget.
While this was a financially prudent move in the short term, in the longer term we needed structural reforms to address larger systematic issues.
New Zealand is experiencing its lowest food price inflation since April 2021, accompanied by a slowdown in broader inflation.
When the rate of inflation falls, it does not necessarily imply a decrease in prices.
While prices were still increasing, they were doing so at a slower rate compared to previous periods. Food price inflation had far outpaced broader inflation in the past few years. Annual food inflation was 0.7% in April 2021.
New Zealanders faced steep price increases for food, with annual food inflation in New Zealand increasing to 10.1% in October 2022 and rising further to 12.5% in April 2023.
Subsequently, food prices remained alarmingly high, reaching 12.1% in May 2023 and again hitting 12.5% in June 2023, matching April’s rate.
Since then, there has been a steady decline, and annual food inflation has consistently been less than 10%. It decreased from 9.6% in July 2023 to 4.2% in January 2024 and further to 0.7% in March 2024.
And, according to the recent figures, food prices increased 0.8% in the 12 months to April 2024.
Higher levels of food prices exacerbated the issue of food security for struggling households and families.
The Ministry of Social Development defined food security in New Zealand as "all people, at all times, have physical, social, and economic access to sufficient, safe, and nutritious food that meets their food preferences and dietary needs for an active and healthy life".
Food insecurity stems from a multitude of factors, such as the high costs of living and accommodation, varying income levels, limited access to food sources, insufficient resources, and the struggle to afford nutritious food options.
Each year, the University of Otago’s Department of Human Nutrition conducts a comprehensive food cost survey, documenting the prices of 150 food items across Auckland, Wellington, Christchurch, and Dunedin. The most recent survey reveals a concerning trend.
The estimated weekly food costs for a family of four to meet basic nutritional needs in 2023 increased 24% compared to 2021.
On a national scale, Stats NZ’s data spanning from 2019 and 2023 highlights the average weekly household expenditure increased 18.4%.
New Zealanders have changed their household spending patterns as the cost of living has increased. Notably, New Zealanders are allocating a larger share of their weekly budget to food.
In 2023, food expenses constitute 18.7% of total net household expenditure, a rise from 17.3% in 2019.
Data from both the University of Otago and Stats NZ underscore the growing financial strain on households and the challenges many families face in accessing nutritious food options amidst rising costs of living.
According to the latest twice-yearly annual Food Hub Survey conducted by the New Zealand Food Network (NZFN) covering July-December 2023, there has been a 42% increase in demand for food support compared to 2022, with a third of recipients seeking assistance for the first time.
Foodbanks throughout the country were witnessing a surge in demand as an increasing numbers of households relied on them to secure a meal.
The recent economic survey on New Zealand by the OECD, published in May 2024, supported the Finance Minister’s perspective, stating that "better control of government spending is needed to keep fiscal consolidation on track in the short run".
This suggests a balancing act for policymakers, as they navigate the need for fiscal discipline while addressing the pressing needs of citizens grappling with the rising cost of living.
The last thing we need is growing inflation risk.
Good monetary policy hinges on good fiscal policy, and due to this interdependence, price levels are influenced not only by central bank policies but also by fiscal policy.
The Budget should steer clear of any populist spending policies that could boost demand and lead to increased inflation.
Inflation does not just pose short-term problems; its long-term effects on standards of living are substantial.
Therefore, maintaining fiscal discipline is essential for ensuring economic stability and safeguarding the wellbeing of citizens in the long run.
According to the recent figures, New Zealand’s annual inflation stands at 4%.
Inflation reached its peak in the second quarter of 2022, with the annual inflation rate hitting 7.3%.
It remained at 7.2% in both the September and December 2022 quarters.
Since then, there has been a steady decline.
Despite this slowing trend, New Zealand is currently experiencing above-target inflation.
The target is to keep inflation between 1 and 3% over the medium term.
So, what should be done to alleviate the cost-of-living challenges in New Zealand?
In the immediate term, the continuation of targeted support programmes, such as the various tax credits available through Working for Families, will aid those facing immediate hardships, ensuring they have access to necessities.
For lasting change and resilience, however, structural reforms are necessary to address underlying systemic issues of economic growth, productivity, and human capital accumulation.
These reforms should include investments in education, skill development, and improvements in health because the cost-of-living challenges affect both the mental and physical health of individuals, disrupting our skill acquisition and creating obstacles for us to use our potential efficiently.
The Human Capital Index (HCI) by the World Bank provides a measurable assessment of how investments in health and education impact the future productivity of a country’s labour force.
In the case of New Zealand, the HCI stands at 0.78.
This figure indicates that a child born in New Zealand would potentially be 78% as productive in adulthood as they could be if they had access to complete education and optimal health throughout their upbringing.
When comparing New Zealand’s HCI with other countries, it shows a slight advantage over the United States (70%) and is comparable to Australia (77%) and the United Kingdom (78%).
However, it lags Japan and South Korea (80%) and significantly trails Singapore (88%).
- Dr Murat Ungor is a senior lecturer in the University of Otago’s Department of Economics.
