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Why did the cost of living rise 4.1% in the year to June 2026?
Published on 04/08/2026
By Shamubeel Eaqub, Chief Economist, Simplicity
The cost of living rose 4.1% in the year to June 2026. The main drivers were fuel (pushed up by the war on Iran), electricity and council rates, rather than broad-based price pressure across the economy. Strip out volatile food and fuel, and inflation is running at around 2%, near the middle of the RBNZ's 1-3% target band. In other words, this is inflation concentrated in necessities and government charges, not the sign of an overheating economy.
Short answer: prices are rising fastest in the things we can't easily avoid, like fuel, power and rates, while the parts of inflation we can choose (discretionary spending) are well behaved. That distinction matters for what the Reserve Bank should do next, and for how households manage the squeeze. Let's unpack what that actually means, first for the economy, then for your back pocket.
The ecomonic aspect
What's actually driving inflation right now?
It's not just the level of inflation that matters, but whether people can avoid the goods and services getting more expensive, and why prices are rising in the first place.
As the chart below shows, our inflation is mainly in fuel, other necessities and government charges. Discretionary inflation, the spending we can choose to do or skip, is sitting comfortably within the RBNZ's 1-3% target band.
What I see is high inflation in a few hotspots, sitting on top of a weak economy that has left households and businesses with depleted reserves, plus near-term risks from an escalating war in the Middle East.
Figure 1: Where the inflation really is: Necessities and govt charges running hot, while discretionary inflation remains inside the RBNZ's 1-3% target band
Should the RBNZ be raising interest rates?
I disagree with the Reserve Bank (RBNZ) that interest rates should rise from here. I know that puts me out of sync with most other New Zealand economists, so let me explain why.
First, the current hotspots of inflation make people poorer, so they will spend less on other things. That's the opposite of a hot economy, where prices rise because there is simply too much demand.
Second, I am fearful of the war in Iran, and it is spreading. If Saudi oil exports are disrupted in the Red Sea, oil prices will rise and lead to shortages. The first stage was offset by drawing down inventories, but those are now low, so any new disruption will be harder to absorb.
Third, the economy already feels weak. The most interest-rate-sensitive market is residential property, and sales have been falling in recent months. Just imagine what higher interest rates would do. The RBNZ says current rates are stimulatory. If so, why are house sales falling? We already have too much debt, and lending growth is anaemic. Maybe I am missing something, or the RBNZ has the temperature-check of the economy wrong.
Is there a wage or profit spiral?
Fourth, there is no evidence of a price-wage or price-profit spiral. There are no spirals in the data. On price-wage: it's Hunger Games levels of competition for the precious few vacancies. This is nothing like the 1970s oil shocks, when collective bargaining meant wages rose with (and sometimes ahead of) inflation, or Covid, when closed borders meant a shortage of workers amid stimulus-fuelled demand.
On price-profit: yes, profits are increasing, but margins are recovering from abysmal, business-closing levels to something more normal. Outside a handful of sectors like banking and finance, there is no sustained increase in margins.
What does this mean for the RBNZ?
The reality is that inflation is high, and it makes people poorer. They will have less to spend, which makes the economy weaker: harder for businesses to raise prices, and harder for workers to win wage increases.For the RBNZ, that means they need a very good read on the true health of the economy, the nature of this inflation, and the risks from the escalating war.
The household aspect
How much have households actually gone up?
The impact on households is best understood in dollar terms, in my view. The chart below shows the biggest increases in weekly costs over the past decade. Home ownership and car-related costs are each up by more than $50 a week.
Add food, insurance, rates, electricity and the like, and it really adds up. For the average family, income from work has risen by around $800 a week over the past decade. The cost of necessities has increased by roughly the same amount, which means everything else, which has also gone up in price, gets squeezed. This shows up in consumer confidence data, where nearly half of Kiwis say their finances are worse than they were a year ago.
Figure 2: The weekly squeeze, item by item.
What can you do about rising costs?
It's hard to avoid the rising price of necessities, but there are some strategies worth considering.
Start with a stock take. Get clear on what assets and debts you have, and your income and expenses. You can use a budgeting app, the free tools on Sorted (sorted.org.nz), or your AI buddy to get you started.
Deal with expensive debt. This is a really good first step. There is often support to consolidate debt and work out a management plan. MoneyTalks (0800 345 123) is a free, publicly funded helpline staffed by trained financial mentors, and they can connect you with free one-on-one help in your community. Use debt wisely, because it's a tool, but it can be a trap if the costs rack up.
Check your savings and assets. Make sure you have enough put away for a rainy day. It's worth periodically checking that your savings, such as KiwiSaver, investment funds and term deposits, are still right for you. That can mean adjusting how much you save and for what, and making sure your investments match the level of risk that suits your circumstances.
Look at your income. Know how much you have to work with, and perhaps consider ways to boost it, for example with more hours or going for that promotion. If there are opportunities to take on training that lifts your future income, that can be a good investment to make.
Focus on spending. This is often where the biggest changes can be made. Sorting your spending into necessary, discretionary and treat buckets can help. There are practical moves like substituting away from expensive things, such as swapping from branded to house-brand products. Going out a little less often, or trading down from a restaurant to a café, can free up cash while you still do the things you enjoy. Subscriptions can be an out-of-sight, out-of-mind cost. I always find some I forgot to turn off, and they really add up. It's also satisfying to know you haven't been trapped by their sneaky ways.
Talk about money openly. There are no easy fixes here. Prices have risen, especially for the things we need, and that requires clear-eyed choices about how we spend. One thing that really helps is talking about money openly. MoneyMates groups exist for exactly this: free peer support with people in the same boat. We are all feeling the pressure, and open conversations can surface good ideas from family or friends on how to manage, or at least build understanding when something has to change.
The bottom line
Inflation is high, but it's concentrated in the things we can't avoid, like fuel, power and rates, rather than a sign of an economy running too hot. In my view that argues for caution from the RBNZ, not higher interest rates on an already-weak economy. For households the squeeze is real, so it pays to take stock, deal with expensive debt, keep your savings and KiwiSaver working for you, and talk about money openly.