The prices of meat, insurance, petrol and public transport have risen faster than other costs, hurting the most vulnerable members of our communities.

A lesser-known inflation measure showing how rising costs affect different parts of the community reveals a disproportionate impact on superannuitants and beneficiaries. 

But they will have the last laugh: the falling interest rates that have offset rising supermarket prices for mortgaged home-owners are now starting to climb again.

To put that in simple terms: those with the least money also have the least choice about how to spend it; more of their budget must be spent on basics like protein (meat, poultry and fish), basic household implements, insurance premiums and rents.

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Those on higher incomes also pay insurance premiums, but it’s a smaller part of their income – and those price rises are offset by the savings they make from all-time low interest rates on their home loans.

For superannuitants, the 2.8 percent rise in costs is the steepest annual rise they have experienced since Statistics NZ began measuring household living costs 10 years ago.

Grey Power president Jan Pentecost said the rising inflation revealed by the household living-costs price indexes confirmed what she had been hearing from members of their elder support group. In particular, some were seriously under-insured because they couldn’t afford rising premiums.

“Our members who own their own houses are able to manage much better than our people who are renting, especially old people who live on their own,” she said.

“Insurance premiums are certainly something that we’re hearing more concerns about, since the Christchurch earthquakes and other disasters. Some of our older people are having great difficulty paying them and we suspect some of our members are under-insured. And some of our older people are finding the basic supermarket food staples are more expensive.”

Statistics NZ published the quarterly household living-cost price indexes this week with considerably less public fanfare than the consumer price index a week-and-a-half earlier. Stats NZ didn’t hold media lock-ups in Auckland and Wellington, as it did for the CPI, to brief journalists on the rising numbers. Economists at the banks and consultancies hadn’t looked at the numbers, when approached for their comment and analysis. 

Doing his family’s weekly butcher’s shop in Onehunga, Turners & Growers worker Sililo Malungahu reckons he is paying a couple of dollars a week more for their lamb ribs, blade beef and chicken nibbles. Photo: Jonathan Milne

That’s understandable: after all, it is the oft-cited CPI that guides the Reserve Bank’s remit to contain annual inflation between 1 percent and 3 percent. And the latest quarterly data showed it had well and truly exceeded that range, hitting 3.3 percent and expected by economists to continue rising all through this year.

But while the consumer price index may be fit for its purpose of guiding monetary policy, it deliberately omits key weekly costs that determine how inflation really affects people’s day-to-day lives. It doesn’t include interest rates, to avoid creating a self-perpetuating loop when the Reserve Bank’s monetary policy committee uses the CPI figure to decide whether to raise the official cash rate.

It also doesn’t include one-off person-to-person payments like the purchase of a house, which is net neutral to the economy. One person is up, the other is down. The CPI does include rents, rates, insurances, and the costs of actually constructing a new house.

The household living-cost price index does include interest rates; and because mortgage payments are such a big chunk of homeowners budgets, that means the HLPI measure looks very different to the CPI. For now, it’s lower. That’s because interest rates have been dropping for most of the past 10 years. But as the three-to-five year rates start to rise and, this month, the two-year rates follow them up, that real-life picture of inflation is about to change.

Why the Consumer Price Index doesn’t tell the full story

Annual HLPI inflation was 2.5 percent in the year to June 2021 – the largest annual increase since September 2011. This was mainly influenced by higher prices for private transport supplies and services, and actual rentals for housing.

For those on low incomes, it was worse. Unlike the consumer price index, the household living-costs price indexes analyse the effects on different demographics: low income, middle income, high incomes, beneficiaries, superannuitants and Māori. And it is in analysing those groups that the discrepancies in rising prices become most stark.

For instance shopping basics like meat, poultry and fish make up a bigger proportion of the household budget  for those on low incomes – so those in the top 20 percent of incomes are paying 10.08 percent more for meat, compared to a year ago, but superannuitants and Māori are paying at least 11.55 percent more.

Down at the butcher’s in Onehunga, Sililo Malungahu was picking up meat for the family, himself and his wife Fane, and their two grandchildren who live with them. Their grandson, 10, and granddaughter, 8, have big appetites like most children their age, and Malungahu reckoned he was paying more for the weekly butcher’s shop, even at a budget butcher’s store.

This week, he had picked up lamb ribs ($20 for 1kg), blade beef (15 for 1 kg) and chicken nibbles ($15 for 1.5kg). “For me. it’s like an extra $2 a week [to] throw some meat on the barbie,” he laughed. And like many others who are worst impacted by raising prices, he and his wife rent a home so they are suffering the pain of rising rents, not the relief of low interest rates.

For those who earn more, and spend more, rising insurance premiums translate to an 8.53 percent year-on-year increase – but for superannuitants and those on low incomes, premiums are up at least 9.53 percent in the past year.

Contrast that with interest payments: for those in the top income and spending quintile they have dropped a massive 18.38 percent in the past year – enough to almost entirely offset all the other price rises in their shopping basket.

But those in the bottom quintile don’t see that saving, because they’re paying rents, not mortgages. The reduction in interest payments was only 14.56 percent, for them. And this is where it’s most dramatic: for superannuitants who may have largely paid off their mortgages, the drop in interest payments was just 8.86 percent; they saw less than half the savings that those on high incomes enjoyed.

Overall, it’s those on fixed government allowances who have born the brunt. Superannuitants’ household costs have risen 2.8 percent in the past year, and beneficiaries’ costs have risen 3.0 percent, as compared to the highest-expenditure households whose costs have risen just 2.3 percent.

“It’s actually probably the ‘middle class’ that’s hardest hit, perhaps those that have recently entered the housing market on more modest incomes and higher debt levels.”
– Kelvin Davidson, CoreLogic

Some things, at least, are constant: across all demographics: every group, rich or poor, was paying at least 16 percent more for petrol than they were a year earlier.

And in the next three to six months, it’s likely that the household living costs price index will start to climb more steeply and overtake the CPI, as more homeowners have to suck up higher interest rates. That means they, instead of the beneficiaries and superannuitants, will begin noticing rising prices more.

Infometrics economist Brad Olsen said beneficiaries have seen the largest increase in costs over the past five years, up 11.7 percent compared to the 9.0 percent growth for all households. “The faster rise in costs for lower income households means that part of the increased support provided by Government has been eroded,” he said.

“Higher housing costs are certainly a key driver, with rents continuing their relentless rise. Transport costs have been a significant driver too in recent times, with higher fuel prices and second hand cars also costing more.”

But he noted the increase in transport costs had hit high-income households far less.

At CoreLogic, chief property economist Kelvin Davidson said that as mortgage rates rise, homeowners will require a higher percentage of their income to service that debt – especially since even a small rise in the rate from a low base translates into a more significant proportional increase.

“Adjusting to that ‘new world’ of rising rates will be a mindset shift for a number of people,” he said. 

“I think that higher income households will be more greatly affected by rising mortgage rates than lower income, simply because higher income are more likely to be homeowners. It’s actually probably the ‘middle class’ that’s hardest hit, perhaps those that have recently entered the housing market on more modest incomes and higher debt levels.”

Newsroom Pro managing editor Jonathan Milne covers business, politics and the economy.

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