Fuel on the fire: How inflation is slamming everyday Kiwis

Sunday, 21 January 2024

Due to production problems some print copies of the Sunday Star-Times did not get this feature

Inflation is putting pressure on Kiwis from every angle, with high interest rates pushing up mortgages and the price of everything from fuel to groceries. Just how much longer will the pain last? Aimee Shaw reports.

The holidays are barely over, but Irene Owen is already saving for next Christmas.

Strict budgeting and eking out cash is the only way the New Plymouth pensioner will be able to keep on top of essentials, as inflation sends her cost of living ever higher.

Owen overpays her utilities by $10 each month to ensure she keeps on top of her expenses, so that by December she can take a month off from the bills and spend the money on Christmas gifts or petrol instead.

The grandmother of three also puts money into the Pak’nSave Christmas Club, and is a regular user of the Gaspy petrol app to find the best fuel prices.

Owen is among thousands of Kiwis hit hard by inflation; an economic crisis that has sent mortgage and interest rates ever higher, meaning many families struggle to afford food and a roof over their heads, while businesses face hard decisions about whether they can afford to continue operating.

It’s not that Kiwis aren’t trying. Consider the case of teacher aide Marcia Martin, who last April described how she had been forced to take on two additional jobs as a cleaner and respite carer just to stay afloat as inflation battered her finances.

Meanwhile Debra Middleton, who plans executive meetings at a top corporate, said she had been forced to work seven days a week, and at a gas station in her evenings.

There’s also Auckland mum Trish Heard, who had hoped to take a year off after the birth of daughter Stella in 2022, but was forced back to the job market much sooner when the family’s home loan repayments jumped up $800 a month.

These are the faces of inflation: everyday people who represent the pain behind those dry Reserve Bank updates.

A persistent crisis

New Zealand has been gripped by high inflation since the tail-end of the Covid pandemic.

Inflation currently sits at 5.6% - much higher than the targets set by the Reserve Bank, which has its sights set on bringing inflation back down to around 1-3%.

Reserve Bank governor Adrian Orr has raised the Official Cash Rate (OCR) as a tool to get inflation under control, and first warned consumers in November 2022 that they needed to curb their spending.

In 2022, the Official Cash Rate rose from 1% in February to 1.5% in April, 2% in May, 2.5% in July, 3% in August, 3.5% in October and 4.25% in November. Last year, it was hiked to 4.75% in February, rising further to 5.25% in April and in May to 5.5%, where it has since remained.

In November, the Reserve Bank said rates need to remain restrictive for longer due to persistent inflation, thought to be the result of high migration, lack of competition in sectors such as groceries that has inflated profits, and higher rents, rates and charges.

Economists are hopeful there could be a cut in the second half of the year, and a United Nations economic report projects the consumer price index will fall to 3.4% this year, then drop to 2.6% in 2025.

But while other OECD countries are starting to experience deflation, and food-price inflation here shows signs of beginning to normalise, the struggle is far from over.

Home-owners will be squeezed by mortgage rates rolling over from records lows of 2% to between 6.5-7%, and inflation in New Zealand is expected to stay higher for longer, in part due to the new government and its policies.

Staying afloat

For Auckland business owner Luis Cabrera, inflation was the final blow that killed his Latin American restaurant chain Besos Latinos.

His was one of many businesses across a wide range of industries hit badly by inflation and rising costs, and 2023 proved to be a dramatic year for liquidations and company closures.

Besos Latinos had been doing it tough due to the City Rail Link and Covid lockdowns, and Cabrera says rapidly rising costs across staff wages, deliveries, ingredients, compliance and rent increases meant it wasn’t possible to stay afloat.

“Slowly, slowly we were not able to cover basic expenses, and we had to let a lot of staff go and simplify the menu.

“The costs of operations were significantly higher. Even suppliers started to increase their delivery fees, a few dollars here and there, it all started adding up.”

Small business owner Megan Hutchison feels similarly stuck.

Hutchison, a sole trader who produces bespoke journals, says inflation has been hitting from multiple directions. First, people stopped discretionary spending as they struggled to balance their budgets. Demand has since bounced back, but Forget Me Not Journals is facing a new raft of problems.

Hutchison says she can’t afford to place large orders, and is limited to about half of what she’d like to produce. She won’t be able to scale the business without borrowing money - but can’t fathom taking out a loan.

“Because of the OCR being so high, the cost to borrow money being so high, it is just unreachable right now,” says Hutchison.

“Post-election I got some really big orders from some of my stockists and that actually sold me out of many of my lines. But, because of the way the year has been, I just couldn’t afford to restock along the way.

“That puts me in a precarious situation because after all the work I have done to get my wholesalers, you become afraid you are going to lose them because you can’t restock them soon enough.”

Hutchison says as a result she’s stopped advertising and posting about certain products on social media, and is unsure if she can afford to launch any new products this year.

“The cost of lending is so expensive. My floating mortgage rate on my house is 8.64% and I’m prepared to do that, to pay interest on my house, but to pay interest on the cost of the stock is just a level that I haven’t prepared myself for.

“I have a mental block at putting so much at risk, because if I don’t sell that stock I would continue to pay interest.”

Hutchison questions whether the Reserve Bank’s efforts to bring down inflation are working.

“As someone who is borrowing, it is a hard pill to swallow. We’re seeing inflation, cost-of-goods increases, increases across the board, whether it be for your family expenses or business expenses, inflation continues.

“You feel like you are paying for it both ways.”

It could be so much worse

While burgeoning costs are hitting hard, economists say inflation would be much worse without those high interest rates.

“If we didn’t have those increases in the OCR over the past year, we would be looking at much higher inflation and it would stay higher for longer and that would be really damaging for the economy,” says Westpac senior economist Satish Ranchhod.

Domestic inflation is forecast to continue to run strong this year, he says, which will keep pressure on the Reserve Bank to raise the OCR further.

Ranchhod says the inflationary environment means every household is feeling financially squeezed - particularly middle-income families who have purchased a home in recent years.

And for those who still have a discretionary budget, dollars are buying less, with tourism, for instance, now on average 20% more expensive than it was pre-pandemic.

“The cost of living squeeze means that a significant amount of people don’t have as much to spend on a holiday, but on the other side of the coin, those that do have disposable income have been flying overseas and spending their holiday money somewhere else in the world,“ says former Tourism Industry Aotearoa boss Chris Roberts, who is now the managing director at Angus & Associates.

Worldline figures show retail spending hit a new record last year thanks to inflation, reaching $36.84 billion through core retail merchants, a 3.8% increase on 2022’s total, but the average transaction value was down by 1.5% to $51.10, suggesting shoppers were more careful with purchasing decisions.

The cautious spending is particularly challenging for business owners who are trying to balance their own personal finances.

“Many establishments resorted to borrowing funds to stay afloat during lockdowns and restrictions, including against their own homes,” says Restaurant Association chief executive Marisa Bidois, describing how food and hospitality businesses have grappled with a long list of challenges.

“While these loans were essential for survival, repayments now need to be met and the increased interest rates have amplified the financial strain, making debt repayment more challenging.”

Some businesses are taking a holistic approach.

Thomas Dietz, founder of meal kit company Woop, says high interest rates and the cost of living crisis are impacting both his staff and his business, and in addition to salary increases the company now offers personal finance and budget coaching for employees.

Woop has also been teaching staff about business and the company’s finances, so they can better understand the real-world impact of factors like inflation.

“We want them to understand profit and loss. For some of them it was totally foreign, but now they are understanding how we spend and make money, and the way business works.”

Dietz says Woop has been distributing surplus food and ingredients to staff to help manage their costs.

“It is not only the cost of living, the trouble for them is interest rates as well, lots of them have mortgages that are putting lots of pressure on their weekly budget.”

Setting people up for failure

Strategist Kate Smith says the pressure from inflation and the cost of living crisis has been “unrelenting”.

With people forced to work an additional job or in some instances two to make ends meet in the current economic landscape, Smith believes the system is setting some people up for failure, no matter how hard they work, and leaving them vulnerable to burnout.

“People have been pushed by the system to deliver more than they are actually capable of delivering,” says the principal at Kate Smith Consulting, adding that inflation is widening the country’s inequality gap.

“If you’re on a minimum wage or, even a living wage, and if you are leaving university with tens of thousands of student debt, you can work as long as you like but you are not going to get ahead.”

Smith says financial stress is contributing to a mental health epidemic among young people, and believes our tax system should be revamped so that it’s no longer “favouring the rich”.

“Raising the OCR is a blunt tool to hold down inflation. If we use inflation as a proxy for cost of living, then arguably it’s not helpful.

“Inflation is hopefully a relatively short-term thing, but it is adding fuel to a fire that was already burning.”