Stats NZ publishes figure for consumers price index plus interest payments, that undermines Government’s claim that ‘inflation has peaked’ 

Mere hours after being sworn in as Prime Minister, Chris Hipkins contrasted New Zealand’s 7.2 percent headline inflation with higher rates in Australia, the UK, the European Union and across the OECD.

He was making the cost of living crisis his “number one priority”; he argued the Government had been doing its part to address the underlying causes, including at the petrol pump and the supermarket, and that was having an impact.

But the Government’s claim that “inflation has peaked” is a fragile one; it relies on one metric. Making the claim, Finance Minister Grant Robertson compared the headline consumers price index increase for the three months to December (1.4 percent) with a higher rise over the three months to September (2.2 percent).

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Measured over 12 months, that same headline CPI is flat on 7.2 percent – and CPI itself contains a glaring omission. Its headline figure doesn’t include the cost of interest payments. Those are going up, and up, and up.

There’s a reason headline CPI doesn’t include interest payments – it’s intended to guide the Reserve Bank in setting interest rates, not to guide the Government in setting fiscal policy, or government agencies in setting benefits and super payments, or employers in setting wages.

But buried in box M40 on table 3.03 of one of five CPI spreadsheets this week is a number that this index is not meant to report: headline inflation with interest payments added in.

It shows that rising mortgage rates are pushing the real cost of inflation far higher than the official headline CPI number of 7.2 percent that Statistics NZ delivered to the Reserve Bank and the Government.

The real cost to New Zealanders is 8.7 percent. That means the impact on the average household budget is 20 percent higher than headline CPI.

About half of fixed rate mortgages will come up for re-pricing within the next 12 months. In many cases, borrowers will face refixing at interest rates that are 3 percentage points higher than those they are currently on.

Westpac NZ senior economist Satish Ranchhod says the combined impact of higher consumer prices and higher interest payments is going to take a big bite out of households’ purchasing power. "That will be a significant drag on spending and economic growth over the coming year," he tells Newsroom.

For many years, public and private sector decision-makers have used the headline CPI to help them set salaries and benefit rates and much more. But as Statistics NZ consumer prices manager Katrina Dewbery previously explained to Newsroom, it was never intended to be used that way.

The CPI is used by the Reserve Bank to inform its decisions on the official cash rate. That's why interest payments are excluded. Otherwise, it would create a loop in which the Reserve Bank increased interest rates in response to a rising CPI, which was increasing because of rising interest rates …

“It comes down to what the main purpose of the CPI is, which is monetary policy," Dewbery said. "You don't want to include anything that could influence monetary policy – it would be somewhat circular if you were to include interest payments in there."

It also doesn't include one-off person-to-person payments such as 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 constructing a new house. So the CPI is fit for the purpose it is intended for – guiding monetary policy – but it's no use at all for the purposes some businesses and government agencies put it to. For targeting its spending increases and spending cuts, the Government is better to be guided by the CPI with interest added in.

Or better still, the purpose-built household living-costs price indexes which measure the impact of the price rises on different social groups such as superannuitants, low-income earners and Māori.

Before a roundtable conversation with new Prime Minister Chris Hipkins on Thursday morning, Auckland Business Chamber published the findings from a survey of its members. Alongside tackling crime, they wanted the Government to curb inflation, reduce the cost of living, and relax immigration settings.

Chief executive Simon Bridges says Auckland businesses don't want the status quo, but neither do they want “transformational” policies such as a compulsory unemployment insurance scheme, Three Waters reforms and Fair Pay Agreements.

“Business has spoken and the message for the Government is clear. It’s time to focus on the basics that restore business confidence," Bridges says.

Will he deliver what they want? Businesses are split, Bridges says, on whether they expect Hipkins will pursue a more economic, business-focused agenda.

“Auckland businesses want stability and certainty with 75 percent of respondents expecting New Zealand to hit a recession this year. One of the key things Chris Hipkins must do is inject confidence back into the economy and deliver a business-focused agenda that installs hope for Kiwi business in the face of global economic uncertainty."

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

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