Rising cost of living due to rebounded inflation has hit New Zealand hard. Inflation has now reached her 7.2%, the highest in 32 years.Video / NZ Herald
According to ASB’s latest economic research, the rising cost of living could increase households’ weekly spending by an average of about $150.
Debt service, food prices, transportation costs all
household pain.
Meanwhile, the report notes that recent floods and Cyclone Gabriel are expected to keep inflation high, already at a 30-year high.
ASB senior economist Mark Smith said household spending is likely to struggle in 2023 as rising costs weigh on household budgets.
“Discretionary spending is expected to remain under pressure, and consumers may also consider cutting back on spending on essentials,” Smith said.
“Although more volatility awaits, we expect rising cost of living to continue to outpace consumer price inflation. Households are expected to continue to face significant pressure on their cost of living.”
Income isn’t expected to rise as much as the cost of living for most households, Smith said.
The ASB expects inflation, currently at 7.2% in December, to rise in the short term to just under 7% in 2023.
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mortgage pain
Debt service continues to be one of the biggest drivers of household costs this year.
Average borrowing costs at the end of 2022 were 4.35%, from a low of 2.83% in September 2021, when the OCR was still at 0.25%, according to Reserve Bank of New Zealand figures.
This translates to a 45% increase in household interest payments in 2022.
Just under 60% of current fixed-rate loans will be reset by 2023, often at much higher interest rates, the report notes.
“Overall, the average mortgage interest rate facing borrowers is likely to rise by about 150 pence compared to 2023, ending the year at just under 6%,” Smith said. Told.
“In that case, the cost of servicing household debt will return to historical averages, as it was a record low share of household income.
“Weekly increase in spending averages $50 per household per week.”
However, Smith says the impact will be very uneven.
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“Households with more debt will experience significant increases reaching hundreds of dollars a week,” he said.
“Other households with higher interest-bearing savings and lower debt will actually experience a positive after-tax cash flow impact from higher interest rates. But this group is largely in the minority.”
Recent data from credit bureau Centrix shows that mortgage delinquency surged in January 2023, reaching a nearly three-year high.
About 18,400 households were behind on their mortgage payments in January, up 22% year-on-year, the highest level since April 2020.
Rising food and transportation costs
Smith said storms in the North Island have hampered domestic food production and prices now have “considerable upward momentum.”
Annual food prices rose 12% in February, the highest since 1989, according to StatsNZ.
Fruit and vegetable prices rose 23% over the year, while general grocery prices rose 12%.
“We expect food prices to rise by about 10% in 2023 (an additional $30 per household each week),” Smith said.
Meanwhile, reductions in fuel excise taxes and public transport fares are due to end later this year, increasing costs for commuters.
The 25 cents per liter fuel tax cut, first introduced last March and extended four times since last March to ease rising gasoline prices, has been extended until June 30.
Half-price public transit will also continue until then, and it is currently estimated that someone who pays $5 a day twice will save $25 a week.
Domestic and international airfares have also surged recently, up 35% and 87% respectively from late-2019 levels, Smith said, adding, “It’s not likely to go down any time soon.
“Overall transportation costs are expected to increase by about 8% compared to 2023 (adding $20 per week).”
Rent and housing expenses are on an upward trend
Even as the housing market continues to soften, housing-related costs continue to rise, Smith said.
“Considering the already severe labor shortage and the billions of dollars in repairs caused by Cyclone Gabriel, we expect the cost of construction and home maintenance services to continue to rise.”
He said home rents are expected to rise further as landlords recoup rising costs and a boost in net immigration adds to demand for rental housing.
Property data from Trade Me last month showed rents hit $595 per week in January, up $25 a year.
However, in Auckland, the median weekly price is $630.
According to Smith, housing costs can increase by 8% annually (or an extra $30 per week).
OCR location
The ASB is expected to raise its official cash rate (OCR) by 25 basis points for two consecutive months in April and May, currently at 4.75% and peaking at 5.25%, Smith said.
“Inflation is too high. Given the potential impact of the cyclone, the near-term inflation outlook is worrisome,” Smith said. “The economy is overheating and we need a period of below-trend growth to keep inflation down.”
On the plus side, he said, the post-Covid-19 rise in retail spending appears to be over, and now the hangover after binge eating has begun.
“The recession will be painful, but hopefully it will ease inflationary pressures, but this is highly uncertain and the RBNZ will not want to miss the chance to rekindle price pressures.
“Nevertheless, the outlook remains highly uncertain as the recent turmoil in financial markets intensifies, with the risk of deflation if it adversely affects economic activity and employment in New Zealand.”
Last week’s weaker-than-expected GDP data allayed concerns that the economy would continue to run out of water. The economy shrank by 0.6% in his December quarter, with manufacturing (down 1.9%) being the biggest contributor to the decline.
“The OCR cut will only come if the RBNZ is confident that inflation will eventually settle below 3%. increase.
“There is also the risk that the RBNZ will put the brakes on monetary policy more firmly if it determines that the inflation directive is under threat,” he said.
