Your browser is not supported

Our website does not support the browser you are using. For a better browsing experience update to a compatible browser like the latest browsers from Chrome, Firefox and Safari.

Inflation

Inflation is the term we use to describe rising prices.

Explaining inflation

Have you ever wondered why the cost of your morning coffee has gone up over the years?

Economist Marea Sing explains what inflation is, and why we care about inflation here at Te Pūtea Matua.

This video is narrated by our economist Marea Sing.

Audio:

Have you ever wondered why the cost of your morning coffee has gone up over the years?
 
Price increases like this across the economy are what we call inflation.
 
Our role here at Te Pūtea Matua is to ensure New Zealanders can plan for the future with the confidence that their money will hold its value, by keeping inflation low and stable.
 
Inflation happens when there's a general increase in prices across a wide range of goods and services in the economy.
It means our money loses its value and buying power over time. We usually see inflation increase when demand for goods and services outpaces supply. For example, if lots of people want to build a house but there are too few builders or materials, the cost of building goes up.

This is because businesses will charge higher prices for their goods or services as long as their customers are willing to pay more. When this happens more generally in the economy, we call this demand pull inflation. But prices can jump around for other reasons too. For example, storms and floods could lead to poor crop harvests, and so higher prices for food. Or shipping delays or disruptions can reduce the availability of goods produced overseas, leading to higher goods prices. Once again, demand for goods will outpace supply, but in this case we call it cost push inflation. 
 
We know how much prices have increased because of the Consumers Price Index or CPI, which we use to tell us how much prices have changed over the year. Stats New Zealand record the prices of food, clothing, transport, housing and about 100,000 different things you can buy or pay for. These are then combined to make up the CPI.
 
Our inflation calculator is an easy way to see how much prices have changed over time. We can look at specific areas of the economy as well as general price increases. Let's look at how the prices of goods and services have changed over the last 20 years or so. Using the calculator, we can see that a trip to the supermarket that cost about $100 in the year 2000 would have risen to $195 in 2023. In other words, for the same dollars your purchasing power has almost halved. On the bright side, wages have risen around 132%, So much more than food prices over this period.

Overall, the CPI, the overall basket of goods and services has increased about 82% since 2000. Roughly a 45% loss in purchasing power. So we care about inflation here at the RBNZ because high inflation and variable inflation comes with substantial costs to the economy and not a lot of benefits.
 
Our main tool to help keep inflation low and stable is the official cash rate, which influences how expensive it is to borrow money from the bank. When inflation is too high, we raise the cash rate so people spend less and save more.

This helps to balance demand for goods and services with supply. Low, stable inflation is the best contribution we can make as a central bank to ensure economic wellbeing and prosperity for all New Zealanders.

What is inflation?

Inflation occurs when prices of a range of goods and services rise on average. It means that money’s buying power is decreasing, although some wages may rise faster than inflation.

In general, inflation occurs when demand for goods and services in the economy is outpacing supply. This leads to widespread shortages of labour and materials. For example, when lots of people want to build a house, it becomes hard to source materials and construction workers, so building costs increase.

Businesses can charge higher prices for the same goods or services, as long as consumers are willing to pay more.

Inflation can also be caused by a rise in the price of imports, such as oil.

Use our inflation calculator to compare how prices of goods and services have changed in New Zealand.

Inflation calculator

Our inflation mandate

To keep inflation low and stable, the Government has set us an inflation target of keeping inflation between 1% and 3% over the medium term, with a focus on keeping future inflation near the 2% midpoint. 

Low inflation is the best contribution we can make to boosting the economic wellbeing and prosperity for all New Zealanders.

If prices are stable, households and businesses can better plan their spending and investment. Low and stable inflation helps the economy to grow. 

We target inflation over the medium term, as prices can jump around in the short term for all sorts of reasons. For example, energy and food prices tend to respond to global market conditions and can rise and fall quickly and significantly.

The flexibility provided by focusing on the medium term means we can avoid creating large swings in interest rates, output and employment in order to respond to temporary fluctuations in inflation. 

Since the late 1980s, we have used monetary policy to achieve low and stable inflation. The Monetary Policy Committee (MPC) uses monetary policy to achieve its mandate, as set out in the Monetary Policy Remit. 

One of the main monetary policy tools we use is the OCR – the interest rate that we charge banks to borrow money from us. This influences how they set their rates. 

Find out how higher interest rates help to bring down inflation 

What are inflation expectations?

Inflation expectations are what people believe inflation to be in the future. High inflation can become persistent if we expect it to stay high in future. For example, businesses are more likely to increase prices of their goods and services if other businesses around them are too.

We care about inflation expectations because people use them to make decisions about spending, borrowing and investing.