Christopher Luxon says the cost of living is ‘under control’ - is that really the case?

Tuesday, 21 January 2025

Prime Minister Christopher Luxon said in a press conference on Sunday afternoon that the cost of living was “increasingly under control”.

The latest quarterly data for the Consumers Price Index will be released on Wednesday, with economists widely expecting inflation to be at its lowest point in four years.

“I am confident that 2025 is going to be an outstanding year for New Zealand,” Luxon said while announcing a Cabinet reshuffle.

“With the cost of living increasingly under control, it’s now time to put our foot on the gas and unleash that growth we want to see in our economy.”

But just because inflation is down, does that mean the cost of living is under control?

Food prices and petrol prices were both expected to rise this year after downturns throughout 2024 and, despite interest rates dropping, many households were still feeling the pinch.

But, according to the official numbers, “it is fair to say the cost of living crisis has ended,” Kiwibank senior economist Jarrod Kerr says.

Inflation has fallen to 2.2% and was expected to be 2.1% on Wednesday, which was a large fall from the 7.3% cost of living crisis peak.

“It will take time for households to feel better about life. But wage growth is running above inflation. And we’re optimistic as a result,” Kerr said.

Household confidence has “been in the doldrums” for a while, he said, firstly hit by the cost of living crisis, then high interest rates, an 18% drop in house prices and a large number of redundancies.

“Now that inflation has dropped to 2.2%, and will ease further, households are a few pay rises away from some ‘real’ income growth. It will take time to be felt. But it’s a nice tailwind.

“2025 will be a year of two halves. The first half will be a bumpy ride, with glimpses of growth. And the second half will see an uplift in activity that will spring to life into 2026.”

Westpac senior economist Satish Rachhod said although inflation is back to the Reserve Bank’s target of 1-3%, the sharp increases in living costs in recent years meant that many households would have seen the purchasing power of their earnings going backwards.

“And although inflation is now back under control, that doesn’t mean households’ purchasing power has recovered,” he said.

“But the fall in inflation is still important. First, it means that households spending power isn’t being eaten away at the rapid pace we saw in recent years.”

The lower inflation was giving the Reserve Bank scope to cut the cash rate, which was important when considering the cost of living.

“Now that inflation is back around target and interest rates are dropping, many households will see an improvement in their disposable income levels as they roll on to lower mortgage interest rates over the coming year.”

Ranchhod said in the next six months, close to half of all fixed-rate mortgages will come up for repricing and for those borrowers who fixed up to two years ago, they could see their interest rate dropping by more than 100 basis points.

On a $500,000 mortgage, that would shave about $300 off your monthly interest payments.

“However, if you had fixed for three or more years, you’ll actually be rolling on to a higher rate, though you’ll still avoid the very high interest rates that we saw last year,” he said.

“Lastly, lower inflation and lower borrowing costs will help to support a recovery in economic growth and employment, and that will be essential for helping to lift households’ purchasing power over the next few years.”