Who’s felt the biggest impact of cost-of-living crunch?

Wednesday, 21 February 2024

• More well-off households have felt the cost-of-living crunch more keenly in recent years, economists say.

• Kiwibank chief economist Jarrod Kerr says it’s unusual

• People were still feeling the effect of the rapid interest rate rise, Kerr said.

Wealthier households have had the biggest cost-of-living crunch over the past couple of years.

Kiwibank economists this week highlighted household living cost data, which shows that household expenses are still increasing at a faster rate than inflation, and it’s the highest-spending households that are most affected.

The highest-spending 20% of households had living cost increases that peaked at 9.4% year-on-year in December 2022. That rate has now eased to 7.3%.

The lowest-spending group is currently facing increases of 6.6%, down from a peak of about 7%.

Kiwibank chief economist Jarrod Kerr said it was unusual. In the most recent bouts of inflation, for which there is data, poorer households had been squeezed the most.

Before 2021, it was consistently the lowest-spending group that had the highest level of inflation.

“That’s kind of expected, you think rents and food are such a large proportion of what they consume, because they don’t have high incomes, and you expect to see that this time around as well. But because interest rates have gone up at such a fast rate - the fastest rate the Reserve Bank has ever done it - that’s hit those that have the most debt. And those that have the most debt have more income.”

The consumer price index measure does not include the cost of interest, but the household living cost data does.

For the highest-spending households, interest payments made up 9.6% of their cost of living. For the lowest-spenders, that was just 2.3%.

People were still feeling the effect of the rapid interest rate rise, Kerr said.

“Particularly people who got into the [housing] market in the last couple of years. That hurts the most.”

Some borrowers were paying rates significantly higher than they had been tested against when it was assessed whether they could afford their loans. “That just points to how much pain some households are going through.”

But Kiwibank’s economists said this should not be confused with how easy it would be for any group to absorb price increases.

“Those in the higher expenditure groups may have larger cash buffers to get them through a period of high inflation.”

Craig Renney, chief economist at the NZ Council of Trade Unions, said it would be a mistake to characterise the lower-spending households as having had an easier experience.

“Inflation is harming everyone differently. If you’re very wealthy and you don’t have debt you’re doing doubly well because your interest rate in the bank is doing very well. If you’re wealthy and you’ve got debt, then you are suffering because of interest payments. If you’re poor and you’ve got debt you’re suffering. If you’re poor and you don’t have debt you’re still suffering.”

He said if interest rates were to fall over the next couple of years, wealthier households with debt would benefit. “If you’re poor, regardless of whether or not you’re in debt you’re still suffering from high core inflation.”

But Kerr said the more indebted households would still be facing home loan rates at least twice what they were at their lowest point.