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.
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.
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.