NCEA Level 2 · Year 12 · Economics · 3 minutes
What is inflation? The story of New Zealand's prices
Inflation: a sustained rise in the general price level. Measured by the CPI, cooled by the OCR.
Key terms
- Inflation
- A sustained rise in the general price level, so each dollar buys less.
- Consumers Price Index (CPI)
- The measure Stats New Zealand uses for the cost of a basket of goods and services that households buy.
- Purchasing power
- How much a dollar can buy, which falls when prices rise.
- Official Cash Rate (OCR)
- The Reserve Bank's main tool; raising it makes loans cost more and saving pay more, which slows price rises.
- Demand pull inflation
- Price rises caused by spending growing beyond what the economy can supply.
- Cost push inflation
- Price rises caused by firms' costs going up, such as pricier shipping and fuel.
Transcript
In mid twenty twenty two, petrol in New Zealand averaged about two dollars eighty four a litre. A year earlier: two dollars thirteen. Prices were rising at their fastest in thirty two years. So what is inflation, and who is meant to stop it?
Inflation is a sustained rise in the general price level. Stats New Zealand measures it with the Consumers Price Index, or CPI: the cost of a basket of goods and services that households buy. In the year to June twenty twenty two, it rose seven point three percent. Each dollar bought less: falling purchasing power.
We've been here before. In the nineteen seventies, world oil prices more than quadrupled, and by nineteen eighty, prices here were rising about seventeen percent a year. Prime Minister Robert Muldoon froze wages and prices, but when the freeze ended, inflation roared back.
Enter the Reserve Bank of New Zealand Act nineteen eighty nine, which made stable prices the Bank's main job. In nineteen ninety it set a target of zero to two percent, often called the world's first formal inflation target. Today it's one to three percent, aiming for two.
The Bank's main tool is the Official Cash Rate, or OCR. Raise it, and loans and mortgages cost more, while saving pays more. So people spend less, and price rises slow down.
Then, in twenty twenty one, two kinds of inflation hit at once. Demand pull: cheap loans and government support pushed spending beyond what the economy could supply. And cost push: jammed supply chains and pricier shipping and fuel pushed up firms' costs. The OCR can't fix a supply chain, but it can cool demand. So the Reserve Bank raised it twelve times in a row, to five and a half percent.
Who loses? People on fixed incomes, because the same dollars buy less. And savers, if their interest rate is lower than inflation. But borrowers can gain: inflation shrinks the real value of what they owe, unless interest rates climb too.
So, three things. Inflation is a sustained rise in the general price level, measured by the CPI. It can be demand pull or cost push. And the OCR cools demand. So when your next mince and cheese pie costs more, you'll know why.
Sources
Every fact in the video, and where it comes from.
- 1stats.govt.nz/information-releases/consumers-price-index-jun…
- In the year to the June 2022 quarter, New Zealand's CPI rose 7.3 percent, the biggest annual rise since June 1990 (a 32-year high).
- The average price of a litre of 91 octane petrol was $2.84 in the June 2022 quarter, up from $2.13 in the June 2021 quarter.
- Housing and household utilities rose 9.1 percent in the year to June 2022 (home ownership costs, i.e. building new houses, up 18 percent; rents up 4.3 percent), the largest contributor.
- Annual CPI inflation by quarter, June 2018 to June 2022: 1.5, 1.9, 1.9, 1.5, 1.7, 1.5, 1.9, 2.5, 1.5, 1.4, 1.4, 1.5, 3.3, 4.9, 5.9, 6.9, 7.3 percent.
- 2stats.govt.nz/topics/consumers-price-index
- The CPI tracks the price of a fixed 'basket' of goods and services, weighted to reflect household spending in New Zealand; Stats NZ publishes it every quarter.
- 3thespinoff.co.nz/business/18-07-2022/a-brief-history-of-inflati…
- In the 1970s oil prices more than quadrupled after OPEC oil embargoes and NZ consumer prices followed; inflation averaged about 11.5% a year in 1970–80.
- In 1982 Prime Minister Robert Muldoon introduced a wage and price freeze; inflation fell, but after it was lifted (1984) inflation returned to 1970s levels (15.4% in 1985).
- The target is now annual CPI inflation between 1 and 3 percent, focusing on the 2 percent midpoint.
- 2021–22 causes: strong demand (fiscal support, easy monetary policy, savings) plus imported cost pressures (oil rebound, Covid supply chain disruption, higher shipping costs).
- 4worksinprogress.co/issue/how-one-kiwi-tamed-inflation
- New Zealand annual inflation peaked at about 17 percent in 1980 (17.2% annual average; quarterly annual rates reached over 18%).
- In 1982 Prime Minister Robert Muldoon introduced a wage and price freeze; inflation fell, but after it was lifted (1984) inflation returned to 1970s levels (15.4% in 1985).
- The Reserve Bank of New Zealand Act 1989 made price stability the Bank's primary function and gave it operational independence; the first Policy Targets Agreement (March 1990) set a target of 0 to 2 percent CPI inflation.
- Annual inflation rose from 6.2% in 1984 to 15.4% in 1985 after the wage and price freeze was lifted and the dollar devalued; 17.2% in 1980.
- 5data.worldbank.org/indicator/FP.CPI.TOTL.ZG
- New Zealand annual inflation peaked at about 17 percent in 1980 (17.2% annual average; quarterly annual rates reached over 18%).
- 6imf.org/external/pubs/ft/seminar/2000/Targets/strach3.…
- The Reserve Bank of New Zealand Act 1989 made price stability the Bank's primary function and gave it operational independence; the first Policy Targets Agreement (March 1990) set a target of 0 to 2 percent CPI inflation.
- New Zealand is widely described as the first country to adopt a formal inflation target; Canada followed in 1991 and the United Kingdom in 1992.
- 7monetaryframeworks.org/new-zealand
- New Zealand is widely described as the first country to adopt a formal inflation target; Canada followed in 1991 and the United Kingdom in 1992.
- 8gazette.govt.nz/notice/id/2018-go1485
- The target is now annual CPI inflation between 1 and 3 percent, focusing on the 2 percent midpoint.
- 9rnz.co.nz/news/top/479330/the-ocr-what-you-need-to-know
- The Official Cash Rate was introduced in March 1999 and is the Reserve Bank's main tool for controlling inflation; changes flow through to the interest rates banks charge and pay.
- 10econpapers.repec.org/RePEc:nzb:nzbbul:march1999:3
- The Official Cash Rate was introduced in March 1999 and is the Reserve Bank's main tool for controlling inflation; changes flow through to the interest rates banks charge and pay.
- 11rnz.co.nz/news/business/453021/reserve-bank-announces-fi…
- On 6 October 2021 the Reserve Bank raised the OCR from a record low 0.25% to 0.5%, its first rise in seven years; by 24 May 2023 it had raised the OCR twelve times in a row, to 5.5%.
- 12rnz.co.nz/news/business/490555/reserve-bank-raises-ocr-t…
- On 6 October 2021 the Reserve Bank raised the OCR from a record low 0.25% to 0.5%, its first rise in seven years; by 24 May 2023 it had raised the OCR twelve times in a row, to 5.5%.
- 13britannica.com/topic/inflation-economics
- Demand-pull inflation: total demand exceeds what the economy can supply. Cost-push inflation: rising production costs (wages, materials, energy) are passed on as higher prices. Inflation erodes the purchasing power of fixed incomes and of savings earning less than inflation, and reduces the real value of debts.
- 14legislation.govt.nz/act/public/1989/157/en/2016-01-01
- Reserve Bank of New Zealand Act 1989 (1989 No 157), section 8: 'The primary function of the Bank is to formulate and implement monetary policy directed to the economic objective of achieving and maintaining stability in the general level of prices.'
- 15croakingcassandra.com/2015/08/03/should-the-statutory-objective-for-…
- Reserve Bank of New Zealand Act 1989 (1989 No 157), section 8: 'The primary function of the Bank is to formulate and implement monetary policy directed to the economic objective of achieving and maintaining stability in the general level of prices.'
Image and sound credits
- Petrol station, Caversham, Dunedin (2026): Andykatib, CC0, via Wikimedia Commons
- Four Square supermarket, Te Kauwhata (2015); container ship Sania, Fergusson Container Terminal (2012): Auckland Libraries Heritage Collections, CC BY
- Stanfords supermarket, Glenfield (1960s): Auckland Libraries Heritage Collections, no known copyright restrictions
- “Carless days scheme is taking motorists for a ride” newspaper clipping; Dual Fuel brochure; Reserve Bank of New Zealand building: Archives New Zealand Te Rua Mahara o te Kāwanatanga, CC BY 2.0
- Tui Atua Tupua Tamasese Efi and Robert Muldoon (detail): Archives New Zealand Te Rua Mahara o te Kāwanatanga, CC BY 2.0, via Wikimedia Commons
- Charts drawn from Stats NZ data (Consumers price index: June 2022 quarter), CC BY 4.0
- Object cut-outs (basket, pie, piggy bank, wallet, house, fuel nozzle): generated with AI
- Paper textures: ambientCG (CC0) · Torn paper edges generated with AI
- Sound effects: Freesound contributors (CC0)
- Music: generated with ACE-Step · Voice: Gemini TTS
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