Cost of living on the rise: what you can do to prepare

Rising housing, petrol, food and clothing costs have pushed up the cost of living for an average family in New Zealand’s biggest city by more than $100 a week — and experts predict that costs will to continue to increase.

Analysis by the Herald based on Inland Revenue household spending figures and extrapolated using inflation data over the past two years shows many Kiwis are having to spend more compared to pre-Covid times.

An Auckland family of two adults and two children who pay a mortgage are now shelling out an average of more than $1600 a week, up from $1509 in mid-2019. Renters have had to find an extra $70 a week.

Meanwhile, solo parents are having to stretch their budget by an extra $47 a week to find $962 if they are renting. If they are paying a mortgage, they are having to find an extra $60 a week, for a total of $959.

Even those who are mortgage-free are having to find more, with families needing an extra $37 a week and solo parents an extra $22.

Finn Robinson, an economist with the ANZ, said Covid had played quite a big part in driving up costs. “A lot of it is the supply disruption story, the shipping disruption we see around the world, freight delays and ports not being able to operate at full capacity.”

Robinson said the fact that New Zealand was a smaller economy meant it was a lot more expensive and took longer to bring items into the country.

“We have seen freight prices increase exponentially in recent months. That is one thing that has pushed up prices.”

That means anything that imported – food, clothes or other goods – is going to cost more.

Finn said the disruption had lasted a lot longer than people had expected and was probably going to continue long into 2022. “Those sort of price increases will be hanging around and will show at the checkout.”

Robinson said there was also underlying inflation pressure coming through in the domestic economy, with housing being one aspect of that.

“The price of raw materials has gone up a lot, you can’t bring builders into the country and builders are flat out at the moment.”

With house prices rising substantially, there is pressure on to build more homes, but bringing building supplies into the country was costing more and companies were having to pay top dollar for their workers.

Finn said that fed into the tight labour market, with the New Zealand unemployment rate already down to 4.7 per cent – higher than pre-Covid but a lot lower than at this time last year.

“Workers are a lot more scarce, they can command higher wages and that all feeds into higher prices as well. Supermarkets are having to pay workers more and that affects prices as well.”

ANZ is forecasting inflation to rise further, from 3.3 per cent in the year to June to 4.2 per cent by the third quarter of this year.

Finn said supply disruptions were not going to go away any time soon, and with the Delta variant of Covid spreading around the world, they might get worse before they get better, which could push up prices more.

He isn’t expecting that high level of inflation to last too long though, as the Reserve Bank is expected to respond by lifting the official cash rate.

Unfortunately for mortgage holders who have enjoyed record low rates in the past few years, that will mean higher borrowing costs.

“For people who have a mortgage, it will definitely make this tougher.” Finn said it would also mean people will not be able to borrow as much to get a mortgage or buy a business, and would mean mortgage holders had less disposable income to spend.

Statistics New Zealand data out this week showed people’s net disposable income – the amount of money households have available to spend after paying taxes – rose 3.1 per cent in the March quarter.

But household expenditure also rose 6.1 per cent, significantly reducing household savings. The amount Kiwis are saving has now fallen to its lowest levels in two years after rising sharply last year when Covid lockdowns meant people were restricted in their ability go out and spend.

The median household income for Aucklanders was $104,821 or $2015 a week in the year to June 2020 – up 4.4 per cent on the previous year. The median disposable income was $87,210, up 4.9 per cent on the year before. Figures for the year to June 2021 won’t be released until next month.

Tom Hartmann, personal finance lead at the Commission for Financial Capability – the government’s money education arm – said if people were worried about costs rising, the best thing they could do to prepare was to have a spending plan.

“The best case is you try and find money from somewhere else by trying to adjust your behaviour. It is the visibility that really empowers you. Knowledge is power, seeing what your position is and seeing how all these categories fit in your situation.”

Hartmann said people could start by working out all their income and outgoings, both regular and occasional, and putting them into a spreadsheet like the one on the commission’s Sorted website.

“Then you start to get a picture. And then you start to see where you are at and whether it is realistic to flow money towards the things you really want to do.”

Hartmann said the key was to have a surplus. “When these categories start to trend upwards, obviously that impacts our savings rate because more has to go to food and groceries.

“This is basically saying people have to be more prepared to spend more of a percentage of their budget.”

Hartmann said it would be interesting to see how the Reserve Bank reacts to the increased inflation and whether it lifts interest rates.

“There is a lot inflation fear floating around.

“When there is a large fear sentiment it can be really good to ask is that really warranted or are people afraid of something that has happened in the past or has happened somewhere else?

“There may be some recollections of that. Maybe people have spent time overseas in countries where they saw the currency devalued so much that people had to rock up with wheelbarrows of currency in order to buy normal things. You hear stories like that. What we know is we don’t make good financial decisions when we are basing them on fear. Fear based decisions are to be avoided.”

But he said people should also have their eyes wide open. “They should think about what could be adjusted.”

Hartmann said inflation would be a new experience for many people as it had been so low for so long.

“For many it is outside the realm of their experience and they can only go by what has been seen elsewhere and in the past.”

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