Is the cost of living crisis coming to an end?

Sunday, 27 October 2024

New Zealand's inflation rate has dropped to 2.2%, the lowest in more than three years. Although prices are still rising, the pace has slowed. Lower prices for air travel, petrol, and vegetables helped, but rent and insurance costs have increased.

Inflation and interest rates are falling and economists say the cost of living crisis is coming to an end.

But it could be some time before those hit hardest feel any real relief, they caution.

Higher costs for the likes of rates, insurance and utilities are likely to keep impacting quality of life for many households.

Inflation and interest rates are falling, so should Kiwis dare to dream of an end to the cost of living crisis?

Economists say yes, but with a caveat.

The cost of everyday essentials rose faster than household incomes over the last three years, with those on lower incomes hit hardest.

Kiwibank chief economist Jarrod Kerr said the light at the end of the economic tunnel was burning brighter as cost pressures continued to ease.

However, it could be some time before everyone felt its effects.

The cost of everyday essentials had risen faster than household incomes over the last three years, with those on lower incomes disproportionately affected, he said.

Kiwibank chief economist Jarrod Kerr says the cost of living crisis is coming to an end. (File photo)

“Food and fuel – both of which have seen the largest increases in price – make up a larger share of low-income household budgets, and these households typically don’t have much wriggle room.”

“Now, pay rises are running above inflation. The cost-of-living crisis is coming to an end, slowly. It may not feel like it yet, but inflation has eased, and will ease further.

“Falling interest rates and rising house prices in 2025 should also bring much needed relief to households.”

With interest rates trending down and house prices edging up in September, a turnaround in the housing market was expected next year.

“But there is still a long backlog to go through first,” Kerr said.

“It’s not until next year that we expect any meaningful improvement. We forecast house prices to appreciate 5% to 7% in 2025.”

At ASB, chief economist Nick Tuffley said, by and large, the price inflation part of the cost of living crisis was over, although rent inflation remained relatively high.

“The impact of high interest rates will still take time to abate, so people with mortgages will still be feeling some degree of pressure.”

Westpac chief economist Kelly Eckhold agreed the pressure on living costs was easing, with inflation slowing and borrowing costs falling.

However, the crisis wasn’t over for a lot of families, who had had their spending power eroded by rapid growth in consumer prices in recent years.

“Even for families that have seen their earnings rise over the past few years, adjusting for the rise in prices they aren’t really much better off than they were before the start of the pandemic,” he said.

Much of the increase in consumer prices had been in non-discretionary areas like rates, insurance and utilities.

Those cost increases were crowding out spending in other discretionary areas, which could have an important impact on households’ quality of living, Eckhold said.

“Furthermore, while inflation has cooled, so has the labour market. Unemployment is rising and wage growth is cooling.

“Put that altogether and it will take some time for many households to recoup what inflation has taken over the past few years.”

Lower interest rates would help, but not all households had mortgages, and it would take time for activity and the labour market to recover, he said.

“As a result, for many households, the cost of living crisis will continue to feel real – even if it’s not getting worse.”