With reference to the first paragraph of Extract A and Figure 1, explain how the change in the exchange rate of the dollar has 'contributed to rising inflation' (Extract A, line 3).
| Date | Inflation Rate (%) |
|---|---|
| Mar 2020 | 1.5 |
| Sep 2020 | 1.4 |
| Mar 2021 | 1.5 |
| Sep 2021 | 4.9 |
| Mar 2022 | 6.9 |
| Sep 2022 | 7.2 |
| Mar 2023 | 6.7 |
Rising inflation in New Zealand
After March 2021, the inflation rate in New Zealand, measured by the Consumer Price Index (CPI), rose significantly, exceeding the Reserve Bank of New Zealand's target band of 1-3%. Sharp increases in the prices of imported fuel and transport equipment resulting from the fall in the exchange rate of the New Zealand dollar have contributed to rising inflation. Between March 2021 and September 2022, overall transport equipment costs increased by 14 percentage points.
The Stats NZ agency identified that the rapid increase in fuel prices affected low-income households the most, as a larger share of their weekly budget goes toward essential travel. This leaves them with very little disposable income to spend on other essential items. Moreover, commercial banks have observed a rise in the size of consumer credit card debt. In order to maintain their basic standard of living, many consumers on low fixed incomes are utilizing revolving credit and taking out short-term personal lines of credit to fund basic consumption.
Inflation peaked at 7.2% in late 2022, prompting the Monetary Policy Committee to raise the Official Cash Rate (OCR) aggressively from 0.25% to 4.75% by early 2023. Real wage growth has lagged behind cost-of-living increases, with basic food-sector wages rising by only around 2.5%, putting significant financial pressure on average households.
Stats NZ updated the CPI basket of goods and services to reflect changes in household spending patterns post-pandemic. Shifts in work-from-home technology, increased home delivery subscriptions, and a decline in international travel spending made it essential to revise the basket weights for 2022.
