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The current state of our economy – an overview

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After the uncertainty of the last two years – and just as it seemed like everything was getting back to normal – it was announced that the inflation rate increased 6.9% in the first quarter of 2022, hitting New Zealanders with increased cost of living.

Inflation is the rate of increase in prices over a given period and is used as a measure of the cost of living in a country. Since 2000, inflation has averaged 2.15% in New Zealand, close to the inflation target of 2%, however there have been two notable spikes in that time. In 2008 it peaked at 5.1% during the global financial crisis and in 2011 it reached 5.3% on the back of the increase in GST and price increases to petrol, food, and cigarettes. 

This latest increase in the cost of living has resulted in petrol prices passing $3 a litre, cheese passing $20 a block and many people having little to no income left after paying their weekly housing bill.  This comes off the back of a global inflation spike due to global supply chain pressures and has worsened due to oil price pressures caused from the events in Ukraine. 

The Government has stepped in to address these pressures. In addition to cutting fuel excise duty of 25 cents a litre and half price public transport for a further two months, they have implemented a targeted cost of living payment; a new temporary payment of approximately $27 per week over three months ($350 total) for the estimated 2.1 million New Zealanders that are over 18 and earn less than $70,000. This is to help protect low- and middle- income households from the immediate impact of the rising inflation and cost of living. The 1 million New Zealanders who receive the winter energy payment of $30 a week are not eligible for the cost-of-living payment also. 

The above measures were included in the Government’s 2022 Budget as part of a $1 billion cost of living package to support low- and middle-income Kiwis as the war in Ukraine and COVID-19 supply chain issues push up prices. The $350 payment is estimated to cost $814 million with the balance going towards other elements of the package. 

But it’s not just inflation that is on the rise. Wage inflation had risen to a 13-year high of 3% at March 2022, however this increase in salary and wage rates has been largely offset by the 30-year high cost-of-living. This has resulted in a reduction in real wages received, hence the cost-of-living payment to ease the impact on low-middle income households. This payment is tax free and starts on 1 August, and those eligible will be automatically paid in three-monthly instalments, assuming that their details are up to date in MyIR. 

New Zealanders aren’t alone with the high inflation increases, in the 12 months to December 2021 Australia’s CPI increased 3.5%, the UK’s increased 5.4% and the US CPI increased 7%. It’s not known if the cost-of-living package measures will be extended, or if additional measures will be implemented, but inflation is expected to peak at 6.7% this year, and steadily fall to 2.2% by 2026. 

Navigating this landscape is complex with rising inflation and interest rates presenting risks across an entire business. Possible impacts include reduced margins from increased costs, suitability of lease agreements and fixed price contracts, and existing financing arrangements. Companies will need to respond to, and manage, these risks which could lead to changes in risk assessment, business plans and even longer term strategy.

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About Author

Tracey Clark

Tracey Clark is a PwC director based in the Waikato office. Email: tracey.e.clark@pwc.com