Fiction: We should aim for zero inflation or deflation to make prices cheaper
Fact: If people keep expecting prices to fall:
- they might hold off buying things
- businesses sell less, so people might lose their jobs
It also makes it harder to pay back debt because incomes aren’t increasing.
But falling prices for some things are totally normal, and can even be a good thing. Deflation only becomes a problem when prices are falling across most of the economy for a long time.
That’s why a small amount of inflation is important. With low and stable inflation, wages can grow, and businesses can adjust prices gradually, making it easier for you to plan ahead.
Some prices will rise faster, some more slowly, some might not change at all, and some prices might even fall.
For example:
- Your takeaway coffee might go from $5 to $6.50
- But your phone bill stays the same
- Things like clothes might even get cheaper during sales.
Stats NZ measures inflation based on a typical “shopping basket” of things New Zealand households spend money on, giving more importance to the items people spend the most on.
That’s why inflation can feel different for everyone – it depends what you spend your money on.
Not all price increases are a problem — especially when they reflect something in high demand (for example, strawberries often get more expensive around Christmas because lots of people want them at the same time) or becoming harder to find (for example, if a storm damages part of a crop, there is less fruit and vegetables available, so prices go up).
If businesses can’t raise prices in response to these factors, they may not be able or want to stay in business.
The problem is when lots of prices rise quickly at once. That can make it harder for everyone to tell what’s really going on, and it puts pressure on people’s budgets.
When inflation is high, your money does not stretch as much, which can make everyday spending, saving, and planning feel tougher.
It can also make things uncertain for businesses, so they may hold back on hiring or investing.
That’s why keeping inflation low and stable is so important. It helps people feel more in control and makes it easier to plan ahead, supporting a stronger, more stable economy over time.
It can be confusing seeing interest rates go up—especially on things like mortgages—when inflation is already high.
When interest rates go up, borrowing gets more expensive. This means people spend less and businesses cut down on investing, so prices stop rising as fast.
Over time, this helps bring inflation down, even though some costs, such as mortgage payments, may go up in the short term.
Higher interest rates can feel tough, especially when things like mortgages get more expensive. But there’s always a trade-off.
When interest rates go up, people and businesses usually cut back on spending and save a bit more. That helps take the pressure off inflation over time. It can also affect the exchange rate, which can make some imported goods and services a bit cheaper.
High interest rates do not impact everyone in the same way, and some people feel the effects more than others.
Our goal is not to make borrowing harder. It is to help keep inflation low and steady, so it is easier to plan ahead and your money holds its value over time.
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