Last week’s announcement that the inflation rate has fallen to 4.0%pa in the March 2024 quarter from a high of 7.3%pa in the June 2022 quarter will have come as welcome relief to households across the country. The latest household living cost data shows the same moderating trend. But it’s still a challenge for many households to balance their finances and more expensive costs.

In this article we look at how households have fared with recent cost-of-living pressures. For many households, income growth has kept pace with cost increases. But there’s evidence that increasing numbers of households have been facing economic hardship since the start of the pandemic and are likely to continue to do so for the rest of this year at least.

The headline inflation rate does not tell the whole story, partly because it is an average which may not reflect different households’ experience of price rises for the things they purchase, and partly because it focuses on price rises in the past 12 months. Higher-than-usual price inflation started to emerge in New Zealand in mid-2021, and the cumulative effects over recent years are substantial.

Stats NZ’s Household living-costs price indexes (HLPIs) provide insight into the higher price inflation experienced by different household types. Chart 1 makes for sobering reading. Between the March 2020 and March 2024 quarters, household living costs rose by around 21%-24% depending on the type of household, compared with just 6%-9% in the four years previous.

Many of the cost increases recorded in the HLPIs have been on essentials such as interest payments (up 89% between the March 2020 and March 2024 quarters across all households), insurance (up 31%), food (up 23%), petrol (up 31%), and rent (up 19%). As our recent analysis shows, households have been changing their spending pattens as a result of higher costs, focusing more on the essentials.

Inflation data shows that price increases have also varied depending on where you live, with more intense price increases in provincial and rural areas, leaving price increases in the main urban centres of Wellington, Christchurch, and Auckland towards the bottom of the list. Between the March 2020 quarter and the March 2024 quarter, regional price inflation varied from 19% in Wellington to 22% in the rest of the North Island and the rest of the South Island. These increases compare with 8.6% growth in prices between the March 2016 and March 2020 quarters in the rest of the North Island and just 7.5% in the rest of the South Island.

It is encouraging that average household incomes have pretty much kept pace with average prices rises, so that the average household is not significantly worse off in real terms than they were at the start of the pandemic. Between December 2019 and December 2023, household living costs rose 23% compared with a 22% rise in Infometrics estimates of average household income. These increases followed a period when average household incomes rose much more than household living costs, leaving households much better off in real terms (see Chart 2).

It is also encouraging that in 2023 households on average spent within their means and increased their savings. Using Stats NZ National Accounts data on aggregate household income, spending, and saving, Infometrics has adjusted these figures for inflation, and calculated average savings per household (see Chart 3). Savings in 2023 averaged $254 per household per quarter in inflation-adjusted terms, which was nothing like the amounts we squirreled away during lockdown when we had nothing to spend our money on except online shopping and streaming channels. But 2023 was still an improvement on the period 2017 to 2019, when households were spending more than they earned despite incomes rising faster than costs during this time.

Much of the analysis so far has been on the ‘average household’. But what about those on lower incomes? How have cost-of-living pressures affected them? The evidence is less encouraging.

In the past few years, we have seen a steady increase in KiwiSaver fund withdrawals for significant hardship reasons. Inland Revenue Department (IRD) monthly KiwiSaver statistics show that in the year to February 2020, 19,260 withdrawals were made for hardship reasons, taking out $109.3m. In the year to February 2024, 32,110 such withdrawals were made – a rise of 67%, taking out just over $253.5m – a rise of 132%.

IRD annual KiwiSaver statistics show that in the year to June 2023, Aucklanders accounted for 41% of total withdrawals, and 42% of funds withdrawn in 2023 for significant hardship reasons, despite only 34% of 15-64-year-olds living in Auckland. Canterbury accounted for 11% of withdrawals, Waikato 9%, and Wellington 8%.

When an early KiwiSaver withdrawal is made, not only do these funds need to be replenished in later years to ensure the fund holder has sufficient income in retirement, but the fundholder is also losing out on the returns these withdrawn funds would have made had they been left in their KiwiSaver account.

Last year also saw the number of Housing Register applicants start to rise again. The Housing Register, often referred to as the public housing waiting list, counts applicants who are not currently in public housing, who have been assessed as eligible for public housing and who are ready to be matched to a suitable property. Households apply for public housing for a variety of reasons, but it is a lower-cost rental option than properties available for rent in the broader rental market.

MSD data shows that the number of Housing Register applicants had peaked at just over 26,800 in the March 2022 quarter, having risen steadily from fewer than 3,500 in 2015. The number had fallen to just under 23,100 in the December 2022 quarter - still a very high number by historical standards. However, by the December 2023 quarter the number had risen back to over 25,300.

A Special Needs Grant (SNG) is a one-off payment from MSD to help pay for an essential or emergency cost if a household can't pay it any another way. A person doesn’t need to be on a benefit to get a SNG. The number of SNGs paid in 2023 was less than in 2022, but still higher than pre-pandemic levels. MSD data shows that in the March 2024 quarter, MSD provided almost 329,000 SNGs for food, which was 10% lower than the March 2022 quarter but still 54% higher than the March 2019 quarter.

MSD data shows that 20,427 Emergency Housing Special Needs Grants (EH-SNG) were provided during the March 2024 quarter, down 42% from the March 2022 quarter but still 18% higher than the March 2019 quarter. For comparison, the number of households in New Zealand has expanded by 10% over the same period.

The Salvation Army State of the Nation 2024 report says that in the year to December 2023, the Salvation Army distributed roughly 92,000 food parcels around the country, a 40% increase from the previous year reflecting the pressures on people’s incomes, as food prices and general living costs were driven higher.

In challenging economic times households tend to take on more credit, and more households tend to go into arrears on their debt. Centrix reports that over the year to March 2024, demand for Buy Now Pay Later (BNPL) credit rose 18%, retail energy credit by 22%, credit cards 9.3% and personal loans by 4.8%. Some of this increased demand is from population growth which rose 2.8% over the same period. The recent surge in net inward migration goes some way to explaining the growth in retail energy credit accounts. The remaining increase in credit demand over and above population growth is an increase per person. There were reductions in demand for mortgages (as house sale volumes remain low) and auto loans (as new car sales decline).

Over the year to February 2024, credit arrears were 8.1%pa higher, albeit coming off historical lows. Arrears have risen for mortgages, personal loans, and BNPL products as households struggle to pay all their bills. Some 179,000 credit active consumers were more than 30 days past due in February 2024, a rise of 33% from February 2021.

Financial hardships are reported to credit reporting agencies by credit providers such as banks, non-bank lenders, and utility companies as part of their monthly reporting. Financial hardship figures have grown month-on-month from around 10,000 in November 2022 to 12,500 in February 2024 with mortgages, credit cards, and personal loans all seeing increases.

If the lowest income households are doing it tough, what help can they expect from the government? The change of government last year means a change in direction in terms of how households are supported. Some of the measures introduced by the previous Labour government have either been stopped or are under review. With significant changes such as increases to personal income tax brackets yet to be outlined by the current government, it is too early to judge whether households will be better or worse off under the new government.

From April 1, the Working for Families tax credit increased from a maximum of $136 per week to $144 per week for the oldest child in a family, and from $111 to $117 per week for subsequent children. The Best Start tax credit rate increased from $69 to $73 weekly after tax. Benefits such as Jobseeker Support and the Supported Living Payment have increased based on increases in the Consumers Price Index or net average wage. Superannuation and the Student Allowance have also increased.

The minimum wage was increased by 2% from $22.70 to $23.15 from 1 April 2024. Minimum wage increases tend to be controversial. This latest increase came in well below the rate of price inflation leaving workers worse off in real terms in the last year. However, the government pointed to significant increases in the minimum wage under the previous Labour Government that were in excess of both price inflation and broader wage inflation. Indeed, Infometrics economists have also pointed this trend out, noting that the increase in the minimum wage since 2018 (when the government changed) was considerably above inflation. If the minimum wage had increased by inflation since 2018, it would only be at $20.73 in 2024.

The current Coalition government has repealed Fair Pay Agreement (FPA) legislation that was passed into law by the previous Labour government. No employees had received FPAs, but several sectors had successfully applied to begin negotiations including bus driving, cleaning, security, hospitality, supermarkets, early childhood education, and port work.

The Labour government’s expensive subsidy of Petrol Excise Duty and RUC charges after the Russian invasion of Ukraine came to an end on 30 June 2023. The Coalition government has announced that the Auckland regional fuel tax will end on 30 June 2024.

Parental Leave payments increased from $661.12 to $712.17 per week on 1 July 2023, and the Coalition government has also confirmed a tax credit repayment for early childhood costs from October 2024.

The Coalition government has committed to continuing to fund the Free School Lunches programme introduced under the previous Labour government, but it is reviewing how the programme is working. There are concerns that job cuts at the Ministry of Education will reduce staff resources devoted to running the programme.

With inflation moderating, you’d be forgiven for thinking that we are through the worst. However, with intense domestic price pressure still present, we think it will be another six to nine months before the Reserve Bank thinks it has combatted inflation enough to start to cut interest rates, with mortgage rates expected to follow suit.

We also expect to see rises in unemployment this year which will make households more cautious about their spending. This analysis has shown that, generally speaking, incomes have been keeping up with price increases. But that’s not the case for all households. Increasing numbers of households have been struggling with economic hardship since the onset of the pandemic and are likely to continue to do so for the rest of this year, perhaps longer.