Surveys show most New Zealanders feel inflation is outpacing their ability to save, while new research suggests this will put more people in a place of sadness, anger and pain
Researchers have found strong correlations between high inflation and low wellbeing, which they hope will inform policy decisions as the Government attempts to steer the economy out of the rapids.
It comes as a survey from the Financial Markets Authority shows only one fifth of Kiwis feel financially secure, and 63 percent say inflation is increasing faster than their ability to save.
The University of Auckland’s Lina El-Jahel and Robert MacCulloch, with Hamed Shafiee of the Productivity Commission, found inflation, and to an even greater extent unemployment, profoundly affects people’s sense of wellbeing.
Using global surveys run by Gallup, the researchers analysed a sample of 1.5 million people across 141 countries, comparing responses about people’s everyday emotional experiences and evaluation of how close they are to their best possible life with rates of unemployment and inflation.
They found economic fluctuations have a direct impact on emotional wellbeing, with more pain, sadness and anger seen under high rates of inflation.
MacCulloch said it’s proof New Zealand needs a plan to get out from under inflation rates that are at a 32-year high.
“Not everyone even agrees that inflation is harmful. There's a view that if everything is rising at the rate of inflation like wages and prices then it doesn't harm people,” he said. “But it does seem from the survey that it is causing pain and hardship for people.”
He pointed to the Reserve Bank of NZ Monetary Policy Amendment Act of 2018, which lists the wellbeing of New Zealanders as one of the institution’s foremost goals - something many other countries don’t have written into laws around monetary policy.
“The Reserve Bank of New Zealand made the mistake of letting inflation get as high as it is," said MacCulloch. "Now the question this country faces is - should we try to get inflation down from over 7 percent to, say, a couple of percent within the next six months or so, or should we take a more gradual approach to bringing it down?”
The research finds a link between monetary policy and the public health issue of New Zealand’s mental wellbeing, which has been on the decline since 2018, according to recent figures released by Stats NZ.
The data showed an increase in the proportion of people who reported poor mental wellbeing from 22 percent in 2018 to 28 percent in 2021.
Meanwhile, the survey results from the Financial Markets Authority showed 14 percent of New Zealanders had a major slide in their household financial situation in the past two years, with reduced income singled out as a big contributor.
Only 21 percent of New Zealanders said they feel secure in their financial position, while 27 percent felt they were beginning to make progress, 37 percent were not making much progress and 15 percent felt insecure.
Despite these insecurities, almost two thirds of respondents said they felt comfortable in their ability to make financial decisions.
MacCulloch said the current rates of inflation ask for a solution, but moving too quickly on it could worsen things, as the recessionary risk of bringing inflation down rapidly could lead to rising unemployment - a factor with 12 times the strength of correlation with negative mental wellbeing.
His advice is to look for a “soft landing”.
He compares the current situation to the 1970s, when quadrupling petrol prices lifted inflation to highs of almost 20 percent by 1980.
“It was really a decade of great dislocation, and we're in a similar debate now around how to get inflation down,” he said. “Should it be brought down as quickly as it was in the 80s at such a big cost to unemployment, or should we bring it down more slowly?”
He said the results of the research say a “slow approach” is the best play at the moment.
It’s a matter of steering away from the Scylla of inflation without being drawn into the Charybdis of unemployment - a manoeuvre requiring a steady hand on the rudder. MacCulloch doesn’t sound too sure that’s what we have.
“It's a shame our central bank didn’t act sooner and put up rates sooner to try and avoid inflation getting this high, but now that it is high in a way there is no way out of quite a bit of pain,” he said.
The researchers said having the data could help central banks to plot the route between the devil and the deep blue sea more accurately in future.
Research co-author El-Jahel said exploring the differing wellbeing ramifications of inflation and unemployment was crucial for monetary policy decisions.
“We believe central banks should focus more of their research efforts on collecting and analysing these kinds of data,” she said.
From a government side, recent responses to inflationary pressures on the cost of living have included a set of three monthly payments, which began this week.
It was a move criticised by community groups and social advocates for missing those receiving the winter energy payment - a group comprised of the people most at need.
Greens social development spokesperson Ricardo Menéndez March said moves like this won’t make a dent in protecting the welfare of people feeling the bite of inflation.
He said while there’s no sure-fire solution to the issue, rent freezes would buy time while monetary and fiscal policy fixes are brought into play.
“There is no single silver bullet intervention that we can make but it is one of the interventions that would be really effective - particularly as we know that those on middle incomes, rent is inevitably eating away a huge chunk of their income,” he said.
“Rent controls would give people more certainty with regard to their daily finances as we move towards other interventions to ensure that people have liveable incomes - and as the Government's monetary policy and fiscal policy help also push inflation down.”
Across the political aisle, ACT leader David Seymour wants to pull down inflation by cutting government spending and taxes.
“So long as the Government is spending up large, it is creating inflation and competing for resources with households and businesses. That has to stop,” he said.
He said tax cuts were not only a possibility, but a necessity if New Zealand is going to “break out of its post-Covid funk and become competitive in a world crying out for investment and talent”.
MacCulloch said the answers he’s seen proffered by both National and Labour have been “a bit tepid”.
“Both parties, if you look at what they are doing on competition, it just strikes me as quite weak… whether it's the supermarkets or building,” he said, adding he doesn’t get the sense that there is a mood for strong competition reforms.
“It’s all very piecemeal at the moment. I think there are major problems and to tinker a bit with competition here and there or to pay $350 to groups to help people right this week with cost of living … I don't think that's going to do it.”
Auckland Action Against Poverty spokesperson Brooke Fiafia wasn’t surprised many households were feeling unable to keep up with inflation, and wanted to see the Government step in with the provision of liveable incomes and universal services to all people, especially those on low wages, young people and students.
“This is to ensure that we all feel secure and safe and able to contribute in ways that our communities deem meaningful to society. Doing this will also mean we’re able to prepare for a just transition as well as strengthen the health of the team of five million as we respond to Covid and the potential of other pandemics,” she said.
“If we’re able to prioritise people and the planet then we can prepare for anything together.”
