How inflation affects your household a little differently than your neighbour, and their neighbour

Wednesday, 31 August 2022

A new tool from Stuff aims to show how your income and spending choices can limit or increase the effects of inflation. Data journalist Kate Newton reports.

Read this story in te reo Māori and English here. / Pānuitia tēnei i te reo Māori me te reo Pākehā ki konei.

Inflation affects all of us, but the way it is spoken about or reported on, often in a series of acronyms – OCR, CPI – can make it feel like an abstract concept, divorced from what we’re experiencing in our daily lives.

Does the ‘inflation rate’ really reflect your own costs of living? And how much more are you paying than you were a year ago, compared to your neighbours, your colleagues, or your relatives?

Using real inflation data from Stats NZ, Stuff has now created a tool that lets you calculate a personalised inflation rate, based on your income, who lives in your household, and a few key features of your household spending.

Our tool recognises that the headline inflation rates can only reflect the overall picture. Inflation affects different groups of people more or less, depending on how much you earn, which types of expenses are rapidly increasing in cost, and which might be stable or even dropping.

You can try out the tool below, and carry on reading for an explanation of how it works (and some caveats about its accuracy).

What’s notable about the current period of rising inflation is that it’s the first time many people under the age of 40 have experienced increases this sharp.

Annual inflation has only gone past 5% once since 1990, when the Reserve Bank Act came into effect (with the aim of keeping inflation within a manageable window).

Before then, high inflation was not uncommon and was particularly rampant during the 1970s and 1980s, partly because of a series of oil shocks (sound familiar?). It also see-sawed in the post-war years.

The chart above shows changes in the consumer price index, or CPI, which is the default inflation measure we use in New Zealand.

Our tool draws on data collected and published by Stats NZ in its household living-costs price indexes.

The indexes are similar to the CPI but calculate inflation for 13 different types of household, by taking each component of a household budget (such as fuel costs, fruit and vegetables, clothing, or rent) and giving them weightings, based on how much each expense counts towards the overall ‘average’ budget for each type of household.

For example, rent has a much higher index weighting for the lowest income households, while a higher index weighting is applied to restaurant and ready-to-eat food for the highest-income households.

You can see on the chart below that inflation is consistently higher than average for the lowest income households, and lower for high-income households.

Part of the reason for this is that poorer households generally spend a greater proportion of their income, full-stop, so are more exposed to rising prices.

Stats NZ also calculates an ‘all households’ rate by combining the 13 groups. This rate is also shown on the chart below, and is the default rate we’ve used in our tool.

Within the overall inflation rate, some goods and services are increasing in price more quickly or consistently than others.

Rent, petrol and fruit and vegetables are all experiencing steep inflation at the moment, but you can see on the chart below that petrol prices have actually experienced deflation several times since 2008.

How do all of these factors feed into our tool?

We’ve calculated your ‘personal’ inflation rate by, first of all, working out which of five income groups you fall into. We then re-weight the index for that income group, based on your answers to our questions.

Here’s a simple (made-up) example. Let’s say an average person on your income spends their money equally on apples, oranges, pears and bananas. The index weight for each type of fruit would be 0.25 (a quarter). But let’s say you don’t like bananas, so you spend your budget equally on the three other fruits instead. The bananas get a ‘zero’ weight in your index, and the three other fruits now count more towards the overall budget, with an index weighting of 0.33 each (a third).

Instead of fruit types (which don’t actually get their own weightings in the index!) we’ve asked specific questions about whether you drive a car, own a home, or are vegetarian. That’s because petrol, rent, and fruit and vegetables are three areas that are contributing strongly to rising inflation at the moment. (Vegetarians: we’ve used a blunt measure of taking meat out of your index.) Using your responses, we can calculate a rate that gives greater or lesser weight to these three components of household living costs.

As an example, the next chart shows the difference in cumulative inflation with, and without, rent.

Our tool is intended as a guide only. Your true personal inflation rate will be much more nuanced than this. If you spend more, or less, on other expenses than the average person on your income, that will feed into the overall calculation.

We also can’t take into account changes in behaviour you may have made to cushion the impact of rising costs. Those might include driving a car less often, changing your shopping habits to buy cheaper brands or less food, or delaying (or cutting) some expenses like buying new shoes and clothes.

What we have taken into account is the number and type of people in your household. We take your household income, the number of children and adults in your house, and work backwards to calculate which income band your household would fall into if it was just a single adult. We’ve used the same method as Stats NZ and you can read more about it here.

How is your household managing the soaring cost of living? Share your tips with Stuff readers by commenting below.