How inflation has changed spending patterns
High inflation in recent years has prompted much discussion about how households are adjusting their spending to cope. Although wages have been increasing too, meaning that households can also afford more, we haven’t had a clear idea of the changing preferences and priorities that dictate what households are spending more or less on.
The recent release of household expenditure statistics from the June 2023 Household Economic Survey (HES) finally provides some answers on how high inflation has changed spending patterns.
Capturing inflation but not the full interest rate increase
The HES usually occurs every three years, and it was set to be collected over the 12 months to June 2022. However, COVID-19 saw the latest HES delayed until the June 2023 year.
The previous HES was for the 12 months ending June 2019, and provides a good reflection of New Zealander’s spending patterns before the economic upheaval of recent years, including the pandemic effects from 2020, high inflation from 2021, and rising interest rates from late 2021.
The most recent HES for the June 2023 year captures the peak of annual consumer price inflation, as the Consumers Price Index (CPI) rose by 7.3%pa in the June 2022 year. But the HES period doesn’t fully capture the increase in interest rates in response to high inflation. Infometrics’ estimates suggest that by June 2023, the effective (average) interest rate for all households was around 4.9%, compared to around 5.9% at present.
Kiwis are spending $248pw more in 2023 than in 2019
HES spending figures show that average weekly household expenditure in 2023 was $1,597.50, up around $248pw from the $1,349.80pw spent on average in 2019 (see Chart 1). The increase in spending works out to average 4.3%pa, in line with the 4.3%pa average increase seen between the 2013 and 2016 surveys.
Those figures work out to see the average household spend $83,070pa in 2023, nearly $13,000 a year more than in 2019.
We’re spending more on everything
As Chart 2 shows, New Zealand households spent more on every broad spending category. All the 12 headline spending groups that Stats NZ reports on saw an increase in spending, even if one of them (communications) only recorded a 20c/week lift.
It’s also the only time in the modern version of the HES that all headline groups have seen an increase in spend. There were three groups that saw a fall in spending in 2019, two in 2016, one that remained unchanged in 2013, and five that decreased in 2010 (compared to the prior spending period).
In 2023, the largest spending occurred for housing and household utilities, with $398pw spent, up around $53pw from 2019.1 Food was the second largest expense for households, with $300pw spent on this group, then transport, with $252pw on average spent by households (see Chart 2).
Inflation boosts food, insurance spend
Although households spent more on all expenditure groups in 2023 compared to 2019, this increased spending was not equal across all groups. High inflation forced households to decide on their preferences and priorities, and the HES data provides a detailed look at how households shifted consumption.
As Chart 3 shows, spending on the essentials of food saw a considerable increase. Food spending rose to 18.3% of average household spending, up from 16.8% in 2019 – a 1.5 percentage point increase. The increase in food spending was driven by “other grocery food”, an opaque grouping that includes instant noodles, breakfast spreads, canned soup, frozen meals, and baby food (among other items). In fact, the increase in relative spending on “other grocery food” was the largest of all classes. Ready-to-eat food also saw an increase in relative spending importance.
The 1.1 percentage point increase in “other expenditure” spending, to 10.7% of household spending, was driven by an increase in savings contributions by households – the second-largest increase of all 137 expenditure classes.
The share of household spending on the miscellaneous spending group rose 0.3 percentage points to 8.5%, the third largest increase. This lift was driven by a larger proportion of spending going to dwelling and health insurance.
Recreation, renovations, and communications less important in the face of inflation
With spending increasing in some areas of household consumption, other areas needed to be sacrificed by households. The largest cutback in relative spending was on recreation and culture expenditure, which retreated 1.2 percentage points to 8.1% of household spending. The key drivers of this shift in spending were relative declines in spending on flight and accommodation travel packages, accommodation services, and sport, camping, and outdoor recreation equipment.
Perhaps surprisingly, the housing and household utilities group had the second largest fall in relative spending importance in 2023. The share of spending on this group fell 0.4 percentage points, to 24.3%. However, the drivers of this decline are understandable at a more detailed level, with relative reductions in spending on materials and services for renovation services and materials, as well as property maintenance materials. Funnily enough, when inflation hits, renovations and maintenance take more of a backseat to buying food. The relative importance of electricity spending also fell. New building costs recorded the fifth-highest increase in relative spending, and local government rates recorded the tenth-highest lift.
The communication group rounds out the top three for deprioritised spending in 2023. The share of household spending going to communications fell 0.4 percentage points from 2019, to 2.4% of household spending. That decline was driven by the reducing importance of telecommunications equipment and services – again, an understandable decision by households to prioritise food spending and let the next phone purchase fall out of the priority list.
Changing spending patterns will influence inflationary impacts
These spending trends help us understanding how households have been responding to high inflation. The shift in spending patterns towards food (an essential item) for example was expected, but the degree of shift towards this group is still interesting.
But the changes in relative spending importance also tell us something about the future of inflation – that as household spending changes, how inflation hits households also changes. A greater spending focus on food, insurance, and rates now means that higher inflation for those groups will be hitting the average household even harder than the current CPI implies. The current CPI is based on older spending weights, when these items were a smaller contribution to household spending. Now that they’re larger, higher inflation for each item will hit harder too. Similarly, lower relative spending on international airfares means that currently high airfare inflation won’t be hitting households as hard as the CPI implies, as that spending importance has shifted.
The recently announced (and usual) review of the CPI basket is important to ensure that we pick up these spending pattern adjustments, so that inflation is best understood, and so that the Reserve Bank knows how inflation is hitting households. The April 2025 deadline for the update feels a long way away. But at the very least, analysis of expenditure data provides a greater steer on how inflation has influenced spending, and how this spending shift will influence inflation-targeting in the future.
2 Some caution is needed with the housing and household utilities group, as this group includes rent, rates, and new building costs. Not all households spend on all these items – people paying rent don’t pay rates directly, or mortgage repayments (which are captured in the “other expenditure” group). People who own a house don’t pay rent, and so on. As a result, the figures for spending on any particular housing type (renting, owning, building) are the average for all households, not just the households that spend on housing in that way, and so each individual figure will be understated.
