New Zealand's cost of living squeeze linked to purchasing power, productivity
Reserve Bank of New Zealand Assistant Governor Paul Conway explained why New Zealanders still feel financial pressure despite easing inflation. He emphasized that the cost of living challenge is fundamentally about purchasing power, not just high prices.
High prices, modest real wage gains
Mr Conway highlighted that New Zealand's cost of living challenge stems from a significant increase in prices since the pandemic.
Overall prices have risen by around 26% since the start of the pandemic, making them high by international standards, particularly for construction and housing services.
While wages have increased by approximately 32% over the same period, leading to modestly higher real wages than pre-COVID levels, the purchasing power of New Zealanders remains, at best, average compared to the OECD.
As Mr Conway noted, "Even though inflation has fallen from its highs, prices are now much higher than they were before the pandemic," contributing to the persistent feeling of being squeezed.
Productivity: The long-term affordability driver
Mr Conway highlighted monetary policy's critical role in improving purchasing power by delivering low and stable inflation, anchoring prices and reducing economic distortions.
Yet, he emphasized its limitations: "Monetary policy can anchor prices, but it can't make New Zealand more affordable by itself.
" Lasting gains in purchasing power fundamentally depend on productivity improvements, allowing wages to rise without fueling inflation.
New Zealand's productivity has lagged advanced economies, necessitating structural policies for competition, investment, innovation, and international connection to lift real incomes and enhance economic resilience.
Beyond central bank levers
Conway's speech clearly delineates the limits of monetary policy in addressing deep-seated cost of living issues.
While price stability is foundational, the real challenge lies in boosting New Zealand's lagging productivity.
This highlights a critical need for coordinated structural reforms to achieve sustainable improvements in living standards.