Inflation really 8.7%

The annual inflation rate was 7.2% – or was it?

. . . But the Government’s claim that “inflation has peaked” is a fragile one; it relies on one metric. Making the claim, Finance Minister Grant Robertson compared the headline consumers price index increase for the three months to December (1.4 percent) with a higher rise over the three months to September (2.2 percent).

Measured over 12 months, that same headline CPI is flat on 7.2 percent – and CPI itself contains a glaring omission. Its headline figure doesn’t include the cost of interest payments. Those are going up, and up, and up.

There’s a reason headline CPI doesn’t include interest payments – it’s intended to guide the Reserve Bank in setting interest rates, not to guide the Government in setting fiscal policy, or government agencies in setting benefits and super payments, or employers in setting wages.

But buried in box M40 on table 3.03 of one of five CPI spreadsheets this week is a number that this index is not meant to report: headline inflation with interest payments added in. 

It shows that rising mortgage rates are pushing the real cost of inflation far higher than the official headline CPI number of 7.2 percent that Statistics NZ delivered to the Reserve Bank and the Government.

The real cost to New Zealanders is 8.7 percent. That’s means the impact on the average household budget is 20 percent higher than headline CPI.

Around half of fixed rate mortgages will come up for re-pricing within the next 12 months. In many cases, borrowers will face refixing at interest rates that are 3 percentage points higher than those they are currently on.

Westpac NZ senior economist Satish Ranchhod says the combined impact of higher consumer prices and higher interest payments is going to take a big bite out of households’ purchasing power. “That will be a significant drag on spending and economic growth over the coming year,” he tells Newsroom. . . 

Three percentage points higher will mean a doubling of current rates, or more for some people.

That’s a lot of money to come out of household and business budgets that are already stretched.

Higher interest rates might on the face of it help people with investment income. But they lose too as inflation erodes the real value of their capital.

The new Prime Minister is promising to focus on the economy, but when he’s leading the government that got us into this mess, how can we have confidence he can get us out of it?

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