Are we in an age of Inflation?

Are we in an age of inflation?

Anybody younger than 40 will have had little, if any experience of inflation. Going to the supermarket to buy the same bottle of milk as last week, and you find it’s more expensive than last week, what’s with that!

Simply put Inflation is an increase in the level of prices of the goods and services that households buy. It is measured as the rate of change of these prices and is calculated in New Zealand by the Consumer Price Index or CPI. To calculate the CPI a ‘basket’ of goods and services are chosen and then weighted to represent how New Zealand households spend their money. This basket includes items such as Food, including restaurants and takeaways, Housing and Rents, Alcohol and Tobacco, Energy, Insurance, Rates, Transport, Clothing and Personal care items.

The CPI has increased 5.90% from December 2020 to December 2021 This is the biggest movement since June 1990. If your income has not increased by at least 5.90% and most have not then, you are going backwards.

Note that changes in mortgage interest rates are not included in the CPI. Mortgage interest rates do tend to rise with increases in the CPI so in effect it’s a double whammy increase!

Economists may not be certain of much, but they do know what causes inflation, as it is explained by the rock-solid law of supply and demand. Prices will rise if there is more money chasing fewer goods and services. And, at the moment, the fuse is burning from both ends.

Coronavirus has caused factories to shut down and has clogged shipping routes helping to limit the supply of anything imported from cars to couches and pushing prices higher. A side effect of closing our boarders has been the greatly reduced availability of overseas workers and immigrants, this combined with an aging population is constraining the supply of labour.

Russia’s war against Ukraine has helped to push up petrol prices which were already rising due to the post Covid global recovery. It is estimated that transport cost makes up about 10% of the cost of most items. The war has also affected the price of some heavy metals such as nickel and copper as well as sunflower oil, grains and wheat. What we are seeing now is an already heavily disrupted, fractured global supply system being further battered by the Russian invasion and “huge” levels of geopolitical tension.

But we cannot blame overseas factors for all of our inflation. Approximately 60% of inflation in New Zealand is produced within New Zealand while 40% is imported.

Consumers, who have collectively built-up big savings thanks to months in lockdown and repeated government support payments, are spending robustly and this demand is driving part of our inflation. Increased Government spending has also contributed to inflation by increasing demand especially in the construction sector.

However New Zealand is not alone, with many other OCED countries experiencing higher inflation than in recent decades.

We do have a bit more pain to come with inflation expected to peak in New Zealand by the end of this year at just under 7.50%. For the average household that represents about $150 a week they will have to find over and above last years’ 5.90% increase and recent mortgage interest rate rises!

The million-dollar question is how high will it go, and for how long will we have to live with this inflation, there are signs that it is becoming stickier.

Now is a very good time to examine your household budget to see where savings can be made, as my best guess is that the inflation bogie man will be around for a few more years yet.