There is plenty of chat about the cost of living.
In fact, the people and politicians alike are talking about it at every opportunity. It’s usually in the form of something like “we have to get the cost of living down”.
And why not? It feels like it just keeps on going up.
Well, I’m sorry to disappoint you all. That’s not going to happen.
Because the cost of living never goes down. And what inflation takes away is seldom given back.
That’s why the impacts of inflation are so nasty. They’re permanent. That $7 coffee is never going back to $5. We used to buy our lunch with a five-dollar note. Now $10 is the starting point.
If you consider the consumer price index alone, one of a number of reference points in the cost of living discussion, it has decreased just once and even then very slightly, in the past 40 years.
Those things are variously impacted by the cost of making them or the cost of bringing them into the country. Manufacturing is, in part, a function of labour costs. Imported products like fuel will vary in price depending on our exchange rate as well as international commodity prices.
And then there is the cost of housing. Construction costs, rental rates and mortgage rates drive what we pay out each year for the roof over our heads. Those of us who own a property then incur the cost of rates. Those rates will vary with the costs of running councils and the extent of works required to keep a city or a district running smoothly.
Our homes and workplaces also need electricity and gas. Prices will vary depending on the availability of supply and the costs of maintenance. Capital costs and infrastructure development will largely be funded by the user, too. And as we know, our infrastructure is old and our costs of construction ridiculously high.
Unfortunately, and irrespective of the cost category, a few factors are hitting us hard at the moment.
Our exchange rate has been under pressure for the past few years. The Kiwi dollar has traditionally traded against the Aussie in a range between 91 cents and 96 cents. But we’ve been below that range for a year or so and this week we’ve dropped to 84 cents. So if we’re buying an item from Australia for A$100, that might have cost us $106 a few years back, but it’s now $119.
It’s the same with the US dollar. Our Kiwi dollar has traditionally purchased between 65 and 75 cents over the past 10 years. But we’ve been as low as 55 cents lately, and have now rebounded slightly to 59 cents.
The exchange rate impacts any product that we import. It might be a flat-screen TV, a kid’s bike or a tank of gas. And it hammers those of us who can still afford to travel overseas, or more importantly, those who have to travel to keep our businesses and products in front of the world’s buyers.
The cost of labour is factored into almost everything we buy. That keg of beer that sits underneath the bar at your favourite neighbourhood pub is costed not only on the price of the brew itself, but also the cost of the people who put the order together in the brewer’s warehouse, those loading the truck, the driver who delivers it to the bar and the guy behind the counter pouring the tipple. That pint was only recently $8. It’s now $12.
In New Zealand, there has been continued pressure to drive up wages for most of the past decade. There are good reasons for paying people appropriately and fairly. Most importantly, it helps us maintain a standard of living that is the envy of many countries. But increasing wages without increasing performance and productivity is ultimately unsustainable.
During the past decade, we have pushed wages up quite aggressively. This has occurred courtesy of constant increases in the minimum wage and the flow-on effects from that. Like inflation, those wage increases never retreat.
In 2008, the minimum wage was $12 per hour. Under the Key-English Government, it grew by 31% over nine years to $15.75 per hour. But the amount was supercharged during the Labour Government’s reign from 2017 to 2023. Annual increases saw the rate go to $22.70, an increase of 44% in just six years.
In both cases, the minimum wage grew by almost double the Consumer Price Index increase during the same periods. In other words, wages, at least those at the bottom end, grew by more than the cost of goods.
As the minimum wage has grown, so too have other wages. Those earning 20% more than the minimum want to keep it that way. What was $30 per hour is now $40. And on and on it goes.
As we know, the increased cost of employing the supermarket worker, the driver and the builder’s apprentice can only be recovered in one way. By increasing the price we pay for the product they deliver.
The wage growth appears to have rejuvenated the trade union movement, who seem to have become much more visible during this parliamentary term, and who see it as their role to drive up pay and conditions.
The result is greater cost for everyone delivering a product or a service to a consumer. Late last year I learned that Air New Zealand alone has 28 collective agreements across five different unions. The education sector deals with the NZEI, PPTA, PPCBU, SPANZ, APEX, TEU, ECE, ECC and the PSA. There might be more. That’s a hell of a lot of administration cost behind the scenes. And let’s remember that every win extracted by these representative bodies has to be paid for by an end user of products and services. And that end user is us!
This week we saw an example at play. We learned that pay-parity legislation is forcing early childhood centres to pay teachers at a higher level. That’s all very well, but those centres have to pay the wages without the corresponding increase in government funding. As a result, fees have to go up for the early childhood centres to be able to function. Who pays for that? Us.
I’m sure those unions are getting better outcomes for their workers. But are they getting better outcomes for the country? Our businesses? Our government departments?
I’m not criticising higher wages. We all want a wealthier society. But improvement in living standards doesn’t come as a result of negotiation. It comes as a result of improving our goods, services and outputs.
In other words, a wealthier country only comes from a more productive country. And therein lies one of our biggest problems. Despite the wage growth, our productivity doesn’t keep up.
Labour productivity is measured as a factor of GDP per hour worked. In New Zealand, averaged over the past 10 years, we are running at less than 1% productivity growth per annum. Over that same period, wage growth, as measured solely by the growth in the minimum wage, has averaged almost 6% per annum.
It’s important to note that productivity stats don’t usually include those working in the public sector. Where productivity has been estimated for the public sector, growth is typically regarded as weaker than the commercial sector.
On top of this, many would say our public sector, being central and local government, is too large for a country of our size. A full 19.5% of our total workforce is employed by the wider public service.
We often talk about comparing ourselves with economies like Ireland, where that percentage is 16% or even Singapore at less than 10%. We have a long way to go to get to those sort of levels.
The cost of living challenge is therefore massive. And so while our politicians are fond of saying that we need to “get the cost of living down”, sadly, it’s not going to happen. It never does.
What we should be focusing on is getting our productive economy up. Up to a level that enables us to maintain the standards of living that we’ve all become used to. Up to a level that justifies the wages bill. We need every working hour to provide greater commercial outputs and a national restructure that delivers fewer, more productive, central and local government servants.
We should retrain those surplus public service workers and others so as they can add value in a productive economy. We constantly talk about immigration as a source of talent. That’s fine, but how about we make the most of our own people too. We need to get the right people in the right places doing the right things.
A more productive economy, a better-balanced economy, should deliver more profits and a greater tax take. Those taxes pay down debt and build needed infrastructure. A stronger balance sheet will deliver a better exchange rate and the entire circle becomes self-fulfilling.
The reality is, unless productivity improves, our way of life becomes unsustainable. Those wage increases can’t keep coming without a corresponding improvement in outcomes. Ultimately, prices will eventually outrun our ability to afford the things we need or want, because our wages won’t be able to keep up.
That’s a 10-year project at least. We’d better get on with it.
This article first appeared in The New Zealand Herald, Saturday 28th February, 2026