Analysis: Superannuitants and other low-income households escaped the worst of the 2022 inflation surge – but it’s they who are now being hardest hit as the cost of living leaps upwards again.
Stats NZ published its quarterly household living-costs price indexes yesterday. And despite the attention paid to so-called headline inflation (the consumers price index) it is the household index that tells us more about the inflation being experienced by regular New Zealanders in the community.
Critically, the HLPI includes mortgage interest payments and uses a ‘payment’ approach reflecting actual cash outflows.
The reason mortgage payments aren’t included in the CPI is sensible: the CPI is intended as a guide to help set monetary policy, and to decide when to raise or lower interest rates. So it also includes big numbers like the cost of building a new home, which don’t feature in families’ regular shopping budgets.
If the Reserve Bank set interest rates according to a CPI index that included the impact of interest rates, then that would create a feedback loop.
So interest rates are excluded from the CPI – but included in the household index. That makes this index, frankly, more useful to the media and the public in telling the tale of how we’re all being affected by inflation.
CPI came in at 4.1 percent for the 12 months to June. HLPI was 3.2 percent – but that average figure hides the devil in the detail.
The cost of living for superannuitants has risen 4.5 percent in those past 12 months, and for low-expenditure/low-income households risen 4.3 percent. By contrast, high-income households have experienced only a 1.9 percent increase in their cost of living.
I haven’t seen the gap this wide since the GFC.
Why is that? Those on low incomes have less flexibility – and with energy prices soaring, they may pay a far bigger portion of their income to heat more poorly insulated, older homes.
Look at the first chart on this page – the brown column showing electricity price hikes is responsible for more than a third of some households’ inflation pressure.
Also, the increase in petrol prices had the largest impact on lower-spending households, as petrol makes up a larger proportion of their expenditure, says Stats NZ prices spokesperson Nicola Growden.
The prices of basic food staples like meat and dairy have also risen steeply. “Superannuitants and low-income people have a high share of spend on necessities, which have increased a lot recently,” says economist Shamubeel Eaqub. “It’s food, rates, electricity, petrol that does the heavy lifting.”
What I’m also seeing is that those on high incomes have continued to enjoy the declining interest rates that have slowly passed through from the Reserve Banks official cash rates cut, that ended in Nov last year.
Even though that cutting cycle has ended, plateaued briefly and now rates have begun rising again, many homeowners are still refixing old fixed terms at lower rates.
For instance, high-income/high-expenditure households enjoyed a 16% reduction in interest payments, offsetting soaring petrol, electricity, rates and food prices. The offset for beneficiaries was only 11.5 percent.
Growden agrees with my analysis: “The high-level response is that we are still seeing falls in mortgage interest payments,” she says.
Nearly 86 percent of superannuitant households own their home; just 8.5 percent still have a mortgage. “The lower rate of superannuitants with a mortgage meant that falling mortgage interest payments had less impact on this group than other groups so their rate of inflation was kept higher.”
I’d argue that, if anything, the HLPI may understate the real gap between those on high and low incomes. That’s because those with more disposable income are also better able to manage their spending, dispense with a few luxuries, perhaps choose to work from home to save petrol.
And why is this different from 2022?
First, as NZ began emerging from its last Covid lockdown in Oct 2021, the Reserve Bank embarked on a series of increasingly sharp interest rates hikes.
These hit the pockets of mortgaged homeowners, but didn’t follow through so quickly to low-income renters or to retired people who’d paid off their mortgages.
Secondly, council rates rises were manageable in 2022, rose to an average 9 percent in 2023, but it wasn’t until 2024 that they soared into double digits.
As superannuitants know better than anyone, in this world nothing is certain except death and taxes. They are inescapable – though the proposed Ratepayers’ Assistance Scheme embraced by both big parties might help ease the pain.
The gap will begin to close between the superannuitants, beneficiaries and the more affluent (but indebted) Gen X home-owners.
The Reserve Bank is expected to keep raising interest rates, which will duly flow through to higher refixed mortgage rates. Conversely, those in rented accommodation are enjoying the lowest rent rises in 25 years.
But for now – as is so often the case – the most vulnerable in our community are feeling the pain worst. And to those on good incomes to whom much is given, even more will be given…
The political parties will be watching this carefully. Beneficiaries’ votes are not heavily contested.
But mortgage-belt Middle New Zealand is writ large in the electoral book of swing voters.
If they’re not feeling the pain as much as those on low incomes, then they may feel better about the country’s economic direction when it comes time to cast their votes.
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