'It’s going to hurt': Kiwis warned to hunker down ahead of ‘year of the squeeze’

Saturday, 29 January 2022

Early childhood education teacher Marchell Linzey, from Karitane, north of Dunedin, with his daughter Emi-Rose, 3.

After two years of pandemic, 2022 was supposed to be the light at the end of the tunnel. But a new storm is coming, as the cost of living reaches crisis point. Kirsty Johnston reports.

Just before Christmas, Marchell Linzey’s worst nightmare came true. He was hit with a $4000 bill from his mechanic and had nothing to pay it with - despite working full-time, growing his own vegetables, and owning a house, there just wasn’t enough money to go around.

The consumer price index (CPI) records changes in the price of hundreds of goods and services. (First published January 20, 2022)

“We have already tightened our belts. We have the garden, we catch fish instead of buying it. We make chutney and jam. We don’t go on fancy holidays,” Linzey says. “But everything is going up - cheese, milk, electricity, petrol, rates, everything - and we still feel like we are sinking.”

Luckily for Linzey, his mechanic let him pay off the bill over time. But he says not many people would be able to do that, and even so, it’s a struggle.

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“That’s eating up my discretionary income until it’s paid off now. Not that we spend much - we don’t buy coffee or go to the movies anyway. It’s like being a student,” he says.

“And I feel like I’m one of the lucky ones - I live in Dunedin where it’s cheaper, and we own our house outright. I don’t know how people get a mortgage now. I don’t know how people around the country, in places like Auckland and Wellington, are dealing with this.”

Official numbers released this week confirmed what people like Linzey already knew - the cost of living has skyrocketed, with prices for nearly everything now much more than they were this time last year.

Inflation - measured by the price of common goods and services like transport, food, and rent - grew nearly 6 per cent in the 12 months to December 2021, and is now at its highest level since 1990.

The last time inflation rose so rapidly was in the 1970s and early 1980s. The Reserve Bank Act was introduced in 1989 with the mandate to keep inflation between a band of 1 per cent to 3 per cent. (File photo)

Mainly, the increase was driven by the cost of construction of new houses; and of transport, mainly due to petrol prices. Statistics New Zealand said during last year the average price of 91 octane petrol rose 30 per cent, from $1.87 per litre to $2.45.

Additionally, rent and food also went up year-on-year, with rental costs increasing 3.8 per cent, and food by 4.1, with grocery items like milk and cheese key contributors.

Susan St John is an associate professor at the University of Auckland Business School. She says beneficiaries will be hit hardest by inflation as basics like food and rent take up more of their income.

Budget advisers and food experts say supermarket prices were already too high before - an issue currently the subject of a Commerce Commission inquiry - and further increases will put families in very difficult positions.

“The food budget is elastic - other things like rent, and power come first and what’s left goes on food,” said Dr Sally Mackay, from Health Coalition Aotearoa.

“If there’s not a lot left over that means people will be unable to make healthy choices - instead they’ll go for high energy, processed food, the same things again and again. That might end up being pasta with nothing on it. Where is the dignity in that?”

Internationally, the story is the same. Inflation is on the rise due to monetary policies introduced to soften the economic blow of Covid, and supply chain issues are restricting the production and flow of goods. Inflation in Australia is 3.5 per cent, in the USA it’s 7 per cent. In the UK, the combination of rising living costs and higher taxes has led to a think-tank calling 2022 the “Year of the Squeeze”.

Previous forecasts said once the supply issues were resolved, inflation would dip. However, this week’s data showed it wasn’t just imported goods driving higher prices. Local products and services were also more expensive, suggesting rising inflation will not be a temporary phenomena linked to Covid-19, but will continue climbing rapidly into 2023.

“The inflation dragon is well and truly awake,” said ANZ. Economists said such conditions hadn’t been seen in New Zealand since the 1970s and early 1980s - when Robert Muldoon was prime minister and inflation was out of control.

Essential workers spent the past two years on the front lines, only to have wage increases that didn’t keep up with inflation. (File photo)

“Recently we’ve had such a period of low inflation that people thought inflation would always be low,” said University of Auckland economist Susan St John.

“We thought it was here to stay, but maybe it’s a golden age that’s come to an end. I think we are entering a new age of scarcity - you can see that in areas like the building industry, with all the delays and cost overruns.”

Traditionally, the main way to counter inflation has been to raise interest rates - with ANZ predicting the Reserve Bank would need to keep increasing the Official Cash Rate by .25 each quarter to make borrowing money harder, serving to dampen demand - but also to make life harder for consumers for at least another year.

Marchell Linzey says friends who teach secondary school earn more than him on their first day. He’s been teaching ten years.

“It won’t be fun,” ANZ’s forecast said. “But that’s why central banks are independent – to make the tough decisions for the long-term health of the economy.”

Its predictions were based on the idea that if inflation increased, wages would also have to increase, as workers demanded higher pay to keep up with higher costs, creating what’s known as a “wage-price spiral”.

Finn Robinson, an ANZ economist, said theoretically, New Zealand employees would be able to take advantage of the current labour shortage and argue their case in the high-inflation environment, fuelling the spiral’s fire.

But other commentators don’t agree wages are likely to cause such a problem.

Craig Renney, an economist from the CTU, said last year, fewer than half of New Zealanders got a wage increase, and those who did were more likely to be high earners, not your average worker.

“In reality most workers have individual contracts, and they don’t have ability to demand wage increases,” Renney said. “The idea that workers will be holding meetings in smoky back rooms and squeezing labour prices with their industrial might is deeply unlikely.”

Rose Kavapalu has been laid off from her second job and doesn't know how she will survive now, let alone when interest rates increase.

He said rather, increasing inflation would only make existing disadvantages worse.

“Before Covid, we had an economy characterised by winners and losers, with concentrations of wealth and economic power in the hands of a smaller and smaller group of investors and homeowners,” he said.

“Workers already had to work increasingly longer hours in more insecure jobs to put food on the table, and if wages don’t catch up that’s likely to get worse, and continue.”

Linzey is an early childhood teacher experiencing such stagnant wages. He earns $61,000 a year. When he started the role in 2010, he was earning just a few thousand dollars less than now. In that same time, inflation has gone up and up, at 3 per cent a year and then 4 per cent and now nearly 6 per cent, but his wage increases haven’t kept up.

“We had a pay freeze for nine years. That meant our pay was devalued by roughly 30 per cent in that time. Now it goes up by 1.8 per cent a year, but inflation is higher, so we never keep up,” he says. “It’s terrifying. I’m actually losing money. I don’t know how I’m going to afford anything in the next few years.”

For those with mortgages, interest rate hikes could be the final financial straw. Data from Corelogic showed roughly 60 per cent of home loans will need to be refinanced in the next year, and forecasts have interest rates doubling within six months. Rates that were 2 per cent will be at 4 or even 5 in just six months, the banks said.

In its forecast, ANZ gave the example of a hypothetical $800,000 mortgage undergoing an increase from 2.21 per cent to 3.49 per cent. Their payments would increase by roughly $115 a week, assuming a 25-year term.

“That’s going to hurt. And when you multiply across hundreds of thousands of borrowers, it’s a lot of disposable income suddenly taken up with increased mortgage payments.”

For some, that will mean fewer dinners at fancy restaurants. The new spa or boat might need to be put on hold. A second rental property purchase could be delayed, for now.

But for other families, including renters who see the interest rate increase passed on, it will mean hardship on top of hardship.

“I have been struggling to even think about it, the when, the where of the mortgage going up,” said Rose Kavapalu, a cleaner from Māngere. “I don’t want to think about it because it’s so mentally draining. The fear, it’s tiring.”

Kavapalu cleans the Ōtāhuhu police station, and has for 16 years. But her hours have been cut and cut, to just five a day. On minimum wage, it’s not enough. But her second job disappeared when Auckland went into the red light Covid-19 setting, and she’s been unable to find another one despite looking every day since.

“I have been looking everywhere, but it is really hard at the moment. There is nothing.”

She says she is hoping minimum wage will be put up. If that doesn’t happen, she doesn’t know what she will do.

“My parents, my husband, they are sick. We really really really budget,” she says. “But on a low income, there’s nowhere to go.There isn’t a way to solve this problem.”

“I just pray that there’s a miracle, and we have enough, we pay the mortgage and there is enough left for hopefully a piece of bread for me.”