How the numbers work: currency and inflation

What is Inflation?

1. When inflation occurs:
2. • Prices of most goods and services increase
3. • Each dollar buys slightly less than before
4. • Purchasing power of money decreases
5. • Fixed amounts (like savings) lose real value

What is Inflation?

1. 2015: Grocery basket costs $100
2. 2025: Same basket costs $130
3. Inflation: 30% over 10 years (~2.7% annually)
4. Your $100 bill buys 23% less groceries in 2025 vs 2015

How Inflation is Measured in New Zealand

1. 1. Stats NZ surveys thousands of prices quarterly
2. 2. Prices weighted by household spending patterns
3. 3. Combined into index (base: June 2017 = 1000)
4. 4. Compared to previous quarter/year
5. 5. Percentage change = inflation rate

What is Purchasing Power?

1. High purchasing power = money buys more
2. Low purchasing power = money buys less
3. Inflation reduces purchasing power over time

Nominal vs Real Values - Critical Distinction

1. Your salary 2015: $50,000 (nominal)
2. Your salary 2025: $60,000 (nominal)
3. Nominal increase: 20% (looks good!)
4. But adjusted for inflation (30% over period):
5. $50,000 in 2015 = $65,000 in 2025 dollars
6. Your actual 2025 salary: $60,000
7. Real decrease: -7.7% purchasing power
8. You're worse off despite 20% nominal raise!

How Inflation Affects Everyday Expenses

1. 2015 median rent (Auckland): $450/week
2. 2025 median rent (Auckland): $650/week
3. Nominal increase: 44%
4. General inflation 2015-2025: 30%
5. Real increase above inflation: 14%

How Inflation Affects Everyday Expenses

1. Electricity (Dec 2025): +12.2% annually
2. Average household: $2,400/year → $2,693/year
3. Over 10 years at this rate: +233%
4. $2,400 → $8,000 power bill by 2035!

1. House insurance: +8-15% annually (recent years)
2. General inflation: 2-3%
3. Real cost increase: 5-12% above inflation
4. $2,000 premium → $3,200 in 5 years

Inflation's Impact on Wages and Income

1. Starting salary: $60,000
2. Annual raise: 3%
3. Inflation: 3%
4. Real purchasing power: Unchanged
5. After 10 years: $80,634 salary, same buying power

Inflation's Impact on Wages and Income

1. Starting salary: $60,000
2. Annual raise: 2%
3. Inflation: 3.5%
4. Real purchasing power: Declining 1.5%/year
5. After 10 years: $73,124 salary
6. But need $85,035 to match original buying power
7. Effective pay cut: -14% over decade!

Inflation's Impact on Wages and Income

1. Starting salary: $60,000
2. Annual raise: 5%
3. Inflation: 3%
4. Real purchasing power: Growing 2%/year
5. After 10 years: $97,734 salary
6. Need only $80,635 for same buying power
7. Real gain: +21% better off!

Inflation and NZ Government Benefits

1. Adjusted annually based on wage inflation or CPI (whichever higher)
2. 2024: Increased 4.65%
3. Keeps pace with inflation usually
4. But discretionary spending power varies

Inflation and Long-Term Goals

1. Target: $100,000
2. Saving: $800/month
3. Time: 10.5 years (assuming 2% return)
4. Seems achievable!

Inflation and Long-Term Goals

1. House prices rising 3%/year
2. $100K deposit today = $134K needed in 10 years
3. $800/month saving won't keep pace
4. Need $1,050/month to hit moving target
5. Or accept longer timeframe

Inflation and Long-Term Goals

1. Nominal target: $1,000,000
2. 35 years of 3% inflation
3. $1M in 35 years = $357,000 today's purchasing power!
4. Real target: Need $2.8M for same buying power
5. Nearly 3x more required

Inflation and Interest Rates/Borrowing

1. Borrow $500,000 for mortgage in 2015
2. Repay over 30 years
3. With 3% inflation, dollars you repay worth less
4. 2045 dollars worth ~40% of 2015 dollars
5. Real debt burden decreases over time

Inflation and Interest Rates/Borrowing

1. High inflation → RBNZ raises OCR
2. Higher OCR → Banks raise mortgage rates
3. Higher mortgage rates → Borrowing more expensive
4. Dampens demand → Slows inflation

1. 2025 salary: $89,631 (28% nominal increase)
2. Looks great on paper!
3. But real purchasing power: $66,073 in 2015 dollars
4. Actual decrease: -5.6% from 2015
5. Lost ~$4,000/year in buying power despite raises

1. Combined NZ Super: $31,200/year ($2,600/month)
2. Savings: $300,000 in term deposits
3. Interest (4%): $12,000/year ($1,000/month)
4. Total income: $43,200/year ($3,600/month)
5. Expenses: $3,200/month
6. Surplus: $400/month

1. 2015: Income $43,200, Expenses $38,400 = +$4,800 surplus
2. 2025: Income $50,600, Expenses $55,900 = -$5,300 deficit!
3. Swing: From $400/month surplus to $442/month deficit
4. Must draw down savings $5,300/year to survive

1. 2015: $300,000 savings
2. 2025: $247,000 (after 10 years drawing down)
3. Real value: $190,000 in 2015 dollars
4. Lost 37% real purchasing power
5. If continues: Savings depleted by age 88

1. Target house: $800,000
2. Deposit needed: $160,000 (20%)
3. Current savings: $50,000
4. Need to save: $110,000
5. Plan: Save $2,000/month for 55 months (~4.5 years)
6. Target date: Mid-2024

1. Started 2020: Need $110,000 more
2. After 5 years saving $2,000/month ($120,000 total)
3. Savings now: $172,600
4. But target moved: Now need $208,800
5. Still $36,200 short despite saving $120K!
6. House prices rose $244K while they saved $122K
7. Lost ground by $122,000