Inflation hits poor twice as hard as rich since 2008

This Statistics NZ chart shows the purple line for the highest spending quintile of the population, while the green line is for the lowest spending quintile.

The effects of inflation have been much heavier in the last decade for poorer consumers than rich ones. That's because tax and policy moves have effectively been regressive, including increases in GST, fuel and cigarette taxes, along with falling prices for goods and services used more by richer consumers.

A regressive tax means a tax increase has a progressively bigger effect the lower down the income scale you go. A progressive tax, like an income tax where the tax rates rise with income, hits those at the upper end of the spectrum hardest.

The new Labour Government has continued that trend with support for a 10 percent tobacco tax increase on January 1, support for 11.5 cents per litre regional fuel tax starting July 1 and removing fees for first year tertiary students from the beginning of this academic year. Poorer households are more likely to smoke and spend a higher proportion of their income on fuel, while richer households are more likely to have children starting in tertiary education.

Statistics New Zealand reported Maori households and the lowest spending households experienced the highest inflation in the March quarter and from a year ago as cigarette taxes rose 10 percent. Prices rose the least for those in highest spending households as they benefited from a fall in overseas travel costs and the move to the free first year of tertiary education. Annual inflation for the highest spending households was 1.4 percent, while inflation for the lowest spending households was 1.8 percent and inflation for Maori households was 2.0 percent.

Since 2008, inflation for the lowest spending households was 22.2 percent, while it was 11.7 percent for the highest spending households. Sharp increases in fuel and tobacco excises, along with the hike in the GST rate to 15 percent from 12.5 percent in 2010, hit poorer households harder because they spend (rather than save) a higher proportion of their incomes and spend proportionally more on fuel and cigarettes.