Survive the Cost of Living Crisis

The cost of living is starting to bite into household budgets. And Amy Hamilton Chadwick says it’s only going to get worse.

You’re standing at the petrol pump looking at $3 per litre. At the supermarket checkout, you’re spending an extra $30 a week. Every day you get an instant reminder of how much prices have risen for every Kiwi household. Why have costs increased so quickly, and how long will this last?

And what can you do to help your household keep up with your new cost of living?

Why is the cost of living increasing?

The cost of living has been rising around the world, thanks mainly to factors caused by the Covid-19 pandemic. The pandemic changed how we live, what we buy, and who we see. The previous balance of supply and demand has been completely upended. We stopped spending, then we started spending far more on products and far less on services.

That threw our supply chains into chaos and it’s only just beginning to emerge from it. Toss into the mix a war in Ukraine and you have a recipe for supply shortages and rising prices. “This is a global phenomenon,” says ASB senior economist Mark Smith, who recently published a Household Living Cost Outlook. “The price of tradable goods, supply-chain frictions, oil prices – they’re adding a lot to inflation at the moment.

“You can then see it broadening out to include domestic prices picking up. “As demand has switched towards goods and away from services, the economy in New Zealand and around the world needs to reorientate, and it doesn’t have the capacity to do that quickly.”

Will prices keep rising?

For now, household costs will continue to go up, says Smith. “Prices are heading one way. That includes not only fuel, food, and shelter, but also non-essentials. “We were surprised by how broad-based the increases were, and they will remain so this year.” Smith forecasts an overall increase in costs of around 7 per cent this year. These persistent price rises are a concern for central banks, which face a dilemma.

“Do you crunch the economy to slow demand and tackle inflation, or take a risk on letting it get out of hand?

“High inflation has a lot of costs in the long term, so central banks are saying they have to tackle it.” The main tool available to tackle inflation is higher interest rates, which means people borrow less and spend less, ultimately reducing inflation. Most central banks are increasing interest rates, including our own Reserve Bank, and Smith says we can expect home loan rates to be around 4.5 per cent by the end of the year. This means the high rate of price growth will ease off, but it may take some time for higher interest rates to have a significant impact. In the meantime, handling higher interest rates can be painful.

What you can you do

Wages are increasing, but Smith says incomes won’t go up enough to bridge the 7 per cent rise in costs. “Like the old saying, you need to live within your means, but for a lot of households that will be challenging. “Many have already trimmed their non-essential spending aggressively, and then they need to look at the essentials – and that’s going to hurt.”

Ways to meet the higher cost of living

If prices are going up by 7 per cent, you’ll need to meet that with either a higher income, lower spending, or both. Economist Tony Alexander surveyed his 25,000 subscribers on how they coped with inflation in the past, and many came back with ideas. These were the most common suggestions:

Find ways to earn more

• Ask for a pay rise: “List your strengths and don’t explain because it’s the cost of living,” suggests one respondent. “Focus on what you bring to your employer. They are more likely to consider it if your reasons are based on what you bring them. After you’ve explained why you are the bee’s knees and you’ve asked for your increase, be quiet and let them do the talking. I’ve worked in HR for countless years and the amounts of time people talk themselves out of an increase is astounding.” • Look for a new job with better pay. • Sell unwanted items on TradeMe. • Take in a boarder or flatmate.

Reduce your spending

• Make a budget and stick to it. • Plan your meals, cook at home, and pack lunches. • Cancel credit cards and buy now, pay later accounts. • Eat more vegetarian meals. • Review all your subscriptions, including insurance, utilities, and entertainment. • Grow your own vegetables. • Cut fuel use – a Consumer NZ study in March found 81 per cent of drivers are already driving less.

Invest in yourself

• Look for investments with higher returns – the share market and property market have both traditionally produced returns above inflation. • Learn more about personal finance, investing, and budgeting. You can learn for free online or from the library. • Start a side hustle. • Keep up to date with the latest apps designed to help you save money, like fuel research app Gaspy, budgeting app Pocketsmith, or Splitwise for sharing expenses with flatmates. Alexander says people should keep household growth rises in perspective. “Over the past 10 years, the cost of living has risen 19 per cent, while wages have gone up 36 per cent. “Over the past 20 years, the cost of living has risen 55 per cent and wages have gone up 109 per cent.” That’s probably not much consolation when you’re filling your tank, but it’s something to consider.