During 2022, New Zealand's annual inflation rate, measured by the Consumer Price Index (CPI), accelerated well beyond the Reserve Bank of New Zealand's (RBNZ) target range of 1% to 3%, peaking at 7.3%. A primary driver was the surge in global food import prices and skyrocketing domestic construction costs, which significantly increased weekly grocery and housing maintenance expenses.
Stats NZ reported that this rapid increase heavily impacted lower-income and middle-income families. Essential items, such as food and energy, represent a larger share of their overall household expenditure, leaving them with limited disposable income for non-discretionary purchases. To cope with these rising living costs, many households have increasingly turned to buy-now-pay-later (BNPL) platforms and bank overdrafts.
Real wages have fallen as nominal wage growth (average hourly earnings rising by 4.1%) failed to keep pace with the headline consumer price inflation rate. In response to these persistent inflationary pressures, the RBNZ aggressively raised its Official Cash Rate (OCR) by 75 basis points to cool down aggregate demand.
With reference to Extract A, explain two likely economic effects of the higher rate of inflation in New Zealand.
53 exam-style questions on Edexcel A A Level Economics 2.1.2 Inflation. Each one has a worked solution and a mark scheme showing where the marks go.