Inflation may be back within the Reserve Bank’s target band, but the experience of the past few years has changed the economy in ways that have been described as “seismic”.
Inflation as measured by the consumer price index (CPI) was running at an annual rate of 2.2% in the September quarter, down from a peak of more than 7% through the second half of 2022.
Economists said the period of high inflation – and the downturn the Reserve Bank’s interest rate response to it created – had changed the economy significantly, in at least seven key ways.
Prices
Prices were still much higher than they had been previously, he said, and that was the new normal.
“It almost went on to a different plain, or train track. We were going along and suddenly shifted on to a higher level for prices and a lower level for economic activity.
“We haven’t seen a permanent shift up in prices for a long time … I don’t think the Reserve Bank or anyone is forecasting outright deflation and if you don’t have outright deflation what happens is you get stuck on that parallel track.
“On a macro level, on a business level, on a household level – businesses have higher costs and higher prices. Everything has shifted up. The value of money has [dropped] – $20 is not the same as it was five years ago.”
Eaqub said there were always permanent changes out of a recession, but it had been a long time since there had been such a surge in inflation.
“We will look back on this period as quite seismic, the ripples will go on for a long time … I have never seen such a sustained period of financial stress among New Zealanders before.”
Equity
Eaqub said there had also been an equity effect caused by the cost-of-living pressure.
He pointed to data from the General Social Survey that showed that almost 50% of people said they had cut back on fresh fruit and vegetables to cut costs in 2023, compared to less than 25% in 2018.
For families composed of one parent with a child or children, this rate was 61% in 2023, up from 40% in 2018.
Just under 40% of people said they had only just enough or not enough money to meet everyday needs.
“That worries me because it has an impact on people’s quality of life, their health,” Eaqub said.
He said the recession had created a larger group of poorer people.
“It’s quite troubling because once you’re in a position of poverty it’s much harder to get out. We know with our current policy changes on welfare it’s harder to escape poverty – benefits are indexed to the CPI rather than wages, which increase much faster. If wages are increasing faster than CPI the gap between poor and rich will widen faster.
“When you’re feeling financial stress it’s really debilitating for a lot of people. You’re unable to take risks, start new things – it weighs on the psyche of a large group of people and has quite a big impact.”
Government debt
ANZ chief economist Sharon Zollner said the structural fiscal deficit would have a lasting effect.
“It’s an awful lot easier to increase spending than to decrease it again.
“You’re getting lots of warning noises from the minister of finance about how this is a long-term project to right size this. It’s easy to spend money very fast and it’s harder to repair the damage, that’s going to constrain us for some time.
“In the context of the longer-term fiscal challenges it’s even more daunting – the ageing population and our national inability to have a grown-up conversation about the retirement age, and climate change which means a higher repair bill for existing infrastructure let alone what is widely recognised as a significant infrastructure deficit.”
She said the country would continue to regret the fiscal spending that was delivered during Covid-19 for “quite a long time”.
“It was very unhelpful in terms of contributing to the inflation problem and the depth of the slowdown we have had to have to fix the inflation problem. The consequences will go longer than that.”
Perception of wealth
Infometrics chief forecaster Gareth Kiernan said the experience of recent years would have brought home to many people that there would be repercussions from increased spending.
“How it can be great when you’re in that position of all that money floating around but ultimately you come out the other side potentially worse off, from an economy-wide perspective or a personal household perspective. Your purchasing power has gone down. Having not been in that position or 30-odd years, there’s a whole generation that has never known that and it has changed perceptions around that.”
Kiernan said New Zealanders were starting to realise that the country was not as wealthy or well-off as it might have thought previously.
Infrastructure issues particularly highlighted this, he said.
“There’s a hell of a lot of work that should be done or we want to see done and we don’t know who or how to pay for that. It’s been brought to a head as costs have increased 20, 30 or 40% depending on what sort of infrastructure we’re looking at. That’s been partly driven by the pandemic and partly by the policy response.
“That’s throwing issues into fairly stark relief in terms of some of those outcomes.”
Housing
Council of Trade Unions chief economist Craig Renney said the experience of the downturn may have changed some people’s perceptions around housing.
“A residential portfolio investment as a quick and easy way to make money… the foundations of that will have been shaken. The construction market is well off its heights and it could take a long time to get back to the levels of the boom period post-Covid.”
Tourism
Renney said international tourism was also yet to get back to levels seen before the pandemic.
“It’s inevitable it will rise again but the extent to which we will see super cheap mass tourism in New Zealand is debatable. While oil prices continue to be elevated and flight prices continue to be elevated… people have choices and they can go somewhere else.”
Working from home
Eaqub said the cost-of-living crunch had also pushed more people to work from home.
Census data showed nearly 20% of adults said they worked mostly from home last year.
“The cost of living and the pandemic has been a big driver behind people choosing to work from home at least some of the time,” Eaqub said.
“The cost of travel is extremely high, the cost of commuting is high – those are real costs in time and money and you’re dealing with a more constrained budget. It makes sense that people would look for other ways of working and living.”
He said that had benefited some of the provincial regions because people could live there, in cheaper housing, on the understanding they could work from home.
