Government policy choices to blame for high inflation that disproportionately affects the poor

Dr Eric Crampton
The Dominion Post
26 January, 2021

Last week’s CPI figures, showing an annual inflation rate of 1.4% in the December quarter, were accompanied by a warning from the Council of Trade Unions’ economist Craig Renney. He noted that inflation hits the poor harder than other groups.

While inflation overall remains on the lower end of the RBNZ’s window, despite substantial quantitative easing, Renney’s warning is not misplaced. It’s backed up by some rather interesting work by Statistics New Zealand.

A few years ago, Statistics New Zealand began producing a new way of looking at the Consumer Price Index, the CPI. The CPI is based on price movements across a standardised bundle of goods and services. But people in different circumstances purchase different things. Even if everyone faces the same prices for each thing they buy, the differences in the things they purchase can make for differences in how people experience inflation.

The Household Living-Costs Price Indexes, HLPI, looks at movements in the prices of bundles of goods and services purchased by different groups: beneficiaries, retirees, Maori, households of different expenditure levels, and households of different income levels.

Compared to baseline prices in the second quarter of 2014, the HLPI had increased by 7.9 percent overall by November quarter of 2020. But it had increased by 11.1 percent for beneficiaries. The lowest-spending quintile of households experienced an HLPI increase of 10.3%; the highest-spending quintile only 5.9%.

Statistics New Zealand has provided HLPI figures going back to 2008. If we compare to that earliest period, the HLPI has increased by 20.2% overall. But the lowest-expenditure quintile’s HLPI went up by 28.6%, while the highest-spending quintile’s was up by only 13.9%. And it rose by 26.4% for beneficiaries.

Or, to put it another way, if a beneficiary household had $1000 to spend in 2014, that $1000 would only buy them $900 worth of goods and services at the end of 2020. But a high-expenditure household’s $1000 would purchase $944 worth of goods and services.

There are many good reasons for avoiding high rates of inflation; its disproportionate effect on poorer groups is one of them. Whatever inflation figure is targeted by the bank, poorer groups tend to experience a higher inflation rate than richer groups. If the Bank weighs equity considerations alongside other considerations, that would constrain the Bank against seeking quite as high of an inflation rate as it otherwise might.

So it is worth looking a bit more closely at just why inflation rates for poorer groups run higher than inflation rates for richer groups.

In March 2018, Statistics New Zealand pointed to the disproportionate effects of tobacco excise hikes on poorer groups. Consumer prices manager Geraldine Duoba noted the price rise for cigarettes and tobacco, which made up about 3% of total household living costs for low-spending households but 1% for high-spending households. Rent increases and petrol price increases, in that quarter, were the next biggest contributors to high living costs for the poor. On the other side, fees-free study helped to depress inflation for high-spending households because they spend disproportionately more on higher education. Policy choices made life disproportionately more expensive for the poor.

December quarter HLPI figures will not be released until 5 February. But last week’s CPI release noted that the “increase in domestic inflation was affected by higher prices for cigarettes and tobacco, rentals for housing, and purchase of new housing, offset by lower prices for telecommunication services.”

The HLPI release in a fortnight will likely again point to tobacco excise and rental costs as driving further price increases that disproportionately hit poorer groups. Those are driven by policy choices.

The prior National Government, in 2011, began annual tobacco excise increases of ten percent per year, in addition to an annual CPI increase. Those annual ten percent increases ended with the excise hike of 1 January 2020; this year, tobacco excise was only increased as an inflation adjustment.

Last year’s cabinet paper on the tobacco excise increases noted that smoking households reported spending 7 percent of their income on tobacco. It also noted that many members of smoking focus groups reported holding back on purchasing other essentials, including food, so that they had enough money to buy tobacco. Annual excise increases that match inflation will mean this does not continue to worsen, but neither will it improve.

A look at the HLPI suggests that increased living costs for the poorest are not just about inflation and monetary policy. They are also a consequence of policy choices. Policy choices to make it hard to build more housing over a long period create housing shortages that drive increases in rents. And policy choices around tobacco excise provide a rather awful trade-off: health benefits for those who quit, but health costs compounded by tighter budgets for those who do not. And while vaping and other untaxed reduced-harm alternatives to smoking can provide a way out for some smokers, there is no escaping the high cost of housing.

Inflation is always and everywhere a monetary phenomenon. But a lot of the increases in living costs for the poorest are driven by policy choices. Hopefully, 2021 brings some better choices.

Stay in the loop: Subscribe to updates