“Our central assumption is that the conflict lasts for three months, and that the price impacts last another three months.”
The report said it expected the increase in fuel costs to add $16.50 a week directly to living costs, with rural communities feeling the pinch harder because of a greater reliance on diesel-fuelled private transport.
It expected not just a drop in spending but also a change in spending habits.
“Typically, during times of financial pressure, households prioritise essential purchases such as groceries, food and beverages and pharmaceuticals, while reducing spending in other areas.
Iran has threatened to sink tankers transiting through the Strait of Hormuz. Photo / Getty Images
“This shift in spending patterns is expected to partially offset the overall increase in household expenses.”
The report’s base assumption was that the conflict would last three months to about mid-year, with the biggest impact on spending over the next six months before the start of a rebound in the final three months of the year.
Bigger hit to broader economy
The weaker domestic demand was also expected to affect other parts of the economy.
“Given that the conflict in the Middle East is also likely to impact economic growth, we see downside risks to household consumption via both the wealth and labour market channels as well,” Tuffley said.
That would also mean a brake on house prices and job creation.
The temporary increase in the base rate of the in-work tax credit for working about 143,000 families was expected to have only limited impact.
The report said the lift in living costs and its effect on consumer spending was a double-edged sword for the Reserve Bank.
“The resultant weakness in domestic demand should help keep a lid on inflation, but it also makes the [Reserve Bank’s] job harder, as weaker growth and rising prices are pulling in opposite directions.”
It was still holding to a forecast of a 25-basis-point rise in the Official Cash rate in December to 2.5%, but was watching the risk that the Reserve Bank may have to raise sooner and more aggressively because of medium-term inflation pressures.
– RNZ