ASB economists say the recovery in household consumption 'pencilled in' for this year 'now looks to be a 2027 story'

Kiwi households face a cost of living hike of about $55 a week this year in the wake of the global oil price shock, economic modelling by ASB economists suggests.

In a detailed Economic Note, titled: The outlook for households amidst a fuel price shock ASB economist Yen Nguyen says the $55 per week increase for average households is "50% higher than under the usual scenario", as a direct and indirect result of the surging fuel prices.

According to the economic modelling, the increase in fuel expenses accounts for more than 70% of the additional cost. And this estimate does include periods in 2026 of lower fuel prices than the war-induced levels.

"Higher fuel prices have immediately pushed up household expenditure on transport. This spending is likely to come at the expense of consumption elsewhere," Nguyen says.

"Indeed, our models show a petrol price shock leads not only to a reduction in overall spending, but a shift in spending patterns away from durables and discretionary categories back towards essential goods and services.

"Overall, the recovery in household consumption we had pencilled in for 2026 now looks to be a 2027 story," she says.

As a 'price-taker' reliant on imported fuel, New Zealand is among some of the most exposed advanced economies to this shock, Nguyen says.

"At the time of writing, domestic petrol prices have surpassed $3.40/litre and we estimate the direct impact of higher petrol prices adds approximately $16.50 per week to average household expenditure compared to pre-conflict levels. With the conflict now entering its fifth week, the risk of a protracted disruption, measured in months rather than weeks is rising."

While the direct impact from higher fuel prices is relatively easy to estimate, the actual impact on household balance sheets is likely to be greater as the impact of sharply higher fuel prices "seeps into" other goods and services households’ purchase," Nguyen says.

"The key uncertainties at this stage include how long the conflict lasts (and how long the Strait [of Hormuz] remains effectively shut), whether we see fuel supply shortages and the potential for damage to Middle Eastern fuel infrastructure.

"Our central assumption is that the conflict lasts for three months, and that the price impacts last another three months. Given these assumptions, we estimate that the wider costs associated with the oil price shock could add ~$55 per week to household expenditure, relative to 2025 levels, which is 50% higher than under the usual scenario."

Nguyen says economic modelling indicates that the fuel price surge will weigh on retail spending throughout much of 2026, with the trough expected around the second and third quarters before a gradual recovery in the fourth quarters.

"The augmented models also suggest a rotation in consumer spending away from durables and discretionary categories toward essential goods and services."

Given that the conflict in the Middle East is also likely to impact economic growth, the ASB economists see downside risks to household consumption via both the wealth and labour market channels as well.

"The temporary increase in the base rate of the in-work tax credit for working families (~143k families) will offer some relief, but its impact is expected to be limited. Overall, our assessment points to sustained multi-layered pressure on NZ household budgets throughout 2026, suggesting that a more pronounced consumer spending recovery is now a 2027 story," Nguyen says.

She says the resultant weakness in domestic demand should help keep a lid on inflation, but it also makes the Reserve Bank's job harder, as weaker growth and rising prices "are pulling in opposite directions". 

Until more data unfolds, the ASB economists are still expecting a first 25 basis-point hike in the Official Cash Rate in December and have pencilled in a further 75bp of OCR hikes over 2027,  giving a 3.25% OCR endpoint, but "with the risk of an earlier and more pronounced OCR hiking cycle if more material risks to the medium-term inflation outlook eventuates", Nguyen says.