Falling laptop and iPhone prices are making room for rising housing and food costs within the 2% inflation target

If inflation has been on target for an entire year, why are New Zealanders still so frustrated by the high cost of living that they’re trying to churn their own block of $10 butter?

That question has been bugging me. Why does it still feel like a crisis?

Prices have stayed high for so long that Madeleine Chapman, editor of the Spinoff, argued we should start calling it the “cost of living reality” and admit it’s not going away.

Inflation is temporary; price levels are forever. But it’s not just that prices are high, many people feel their costs are still rising while their incomes fall further behind.

At first glance, the headline numbers don’t back this narrative. But take a closer look.

There are different ways to measure inflation. The Consumers Price Index (CPI) is the official basket of goods and services built to help the Reserve Bank (RBNZ) track and manage prices.

But the central bank itself focuses more on core inflation, which excludes volatile items and one-offs unlikely to create lasting pressure.

The RBNZ estimates core inflation to be about 2.8% and easing. Statistics NZ has headline inflation at 2.7% and rising. Both are within the target range, albeit at the top end.

Prices vs costs

Households care about a different set of prices. Stats NZ’s Household Living-costs Price Index (HLPI) includes interest payments and uses different weights for the categories.

When last updated in December, it showed household costs had risen 3% over 2024, compared to 2.2% in the CPI. That gap, if sustained, may help explain why costs still feel like they’re climbing too quickly.

This HLPI shows household costs rose more than 25% during the four years to December, while the CPI recorded a slightly lower 22.3% increase.

A 25% lift is a lot to absorb. But it doesn’t fully explain the crisis, because wages have broadly kept up. Median weekly earnings rose 26.8% over the same period, a 1.4% real gain after household costs.

That said, much of that wage growth came from people moving into higher-paying jobs. The Labour Cost Index, which tracks wages in a fixed role, rose only 16% over the same period.

Slower wage growth—even with career progression—and household costs rising faster than inflation help explain why people still feel hard done by.

Workers who’ve earned a pay rise through promotion or job changes may feel it should have lifted their spending power, not just kept them afloat.

But there’s another factor creating the crisis feeling: relative prices.

The RBNZ only targets generalised inflation. It doesn’t matter to the Bank which prices rise or fall, only that the overall change averages around 2%.

People, of course, care about relative prices. It matters if certain costs rise faster than wages or other goods. Such as with the treacherous surge in butter prices.

And it’s not the only example. The price of everyday basics and necessities has kept climbing, crowding out spending on other goods and services, even as headline inflation has stabilised. 

Necessities inflation

In the year to June: groceries rose 4.8%, dairy 9.9%, fruit and meat 5.6% each. Cooking oils jumped 25%, coffee and tea 10.4%. Rents rose 3.2%, adding to years of sharper increases. Council rates were up 12.2%, household energy 9.4%, home and contents insurance 10%, and pharmaceuticals 9.5%.

Other prices need to fall to offset these increases. Petrol dropped 8%, which does help the weekly budget. But many of the other declines were in one-off purchases.

Mobile phones were down 25%, computers 11.1%, and household appliances 8.8%. Other groceries, such as sauces and treats, fell 3.1%. New cars dropped 2.8%, and women’s shoes 3.9%.

Sharon Zollner, chief economist at ANZ, said “inflation in necessities” was crowding out discretionary spending and pushing down prices on those goods.

ANZ’s July consumer confidence survey found a net 21% felt worse off than a year ago, and 8% thought it was a bad time to make a major purchase.

With so much money going on basics, there’s less left for phones, computers, or kitchen espresso machines. Women are paying council rates and power bills instead of buying new shoes.

Future inflation expectations in the survey rose to a two-year high of 5.1%, which Zollner said was likely driven by these sharp increases in food, insurance, electricity, and council costs.

Inflation measured by a ‘Basic Stuff Price Index’ would still be running hot. Prices in a ‘Fun Stuff Index’ might be cooling, but they don’t show up in most weekly budgets.

People aren’t upset about the rising cost of consumption, they’re upset that the rising cost of staying alive is preventing them from buying things that improve their quality of life.

They say to themselves, I worked hard for that promotion and can’t even afford butter.

And that’s why it still feels like a cost crisis.

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