Household budgets across New Zealand are increasingly squeezed as the cost of living continues to rise, with a particularly sharp increase in utility bills impacting discretionary spending. New data from Kiwibank reveals that families are spending 36% more on utilities – encompassing things like electricity, gas, and water – compared to the same period last year, leaving less money available for non-essential purchases. This shift in spending patterns is particularly noticeable in sectors like fashion retail, signaling a broader trend of consumers prioritizing necessities over wants. Understanding these changes in consumer spending is crucial for businesses and policymakers alike.
The impact of rising costs is evident in recent transaction data. While the number of transactions increased slightly in December – up 0.4% compared to the previous year – January saw a significant drop, falling 2.7% below the 2025 monthly average and 2.3% compared to January of the previous year. This “hangover” after the holiday season suggests that consumers are becoming more cautious with their spending. Despite the decrease in shopping trips, the total amount spent did increase in both December (8.6%) and January (3.7%), indicating that people are spending more per transaction, largely due to inflation and higher prices.
Fashion Retail Faces Headwinds
Kiwibank economist Sabrina Delgado notes that the apparel sector is being particularly hard hit by these economic pressures. Spending on clothing appears to be in a “persistent decline,” as households allocate more of their income to essential expenses. This trend is reflected in the broader retail landscape, where shops are experiencing a tough period. Delgado explained that while interest rates are lower than the previous year, the rising cost of essentials continues to strain household finances. The early data for February suggests this trend may continue, with transaction volumes currently tracking 4.3% lower than the same time last year.
Shifting Spending Habits: Dining Out vs. Coffee at Home
The data also reveals a shift in how people are allocating their discretionary income. While spending at cafes has decreased, likely due to higher food prices – with a 9% increase in cost per visit compared to last summer – spending on dining out has remained relatively stable. This suggests consumers are willing to spend on experiences, but are cutting back on everyday luxuries like coffee and brunch. Takeaway spending is also experiencing a decline. Consumers are, it seems, “gritting our teeth through our homemade instant coffees instead,” as Delgado put it.
A Bright Spot for the Housing Market?
Amidst the broader economic slowdown, one area is showing signs of strength: demand for housing-related goods. Trips to hardware stores increased by 6% year-on-year in December, with spending up over 30%. This surge in activity suggests households are preparing for a potential improvement in the housing market, perhaps anticipating renovations or upgrades. Delgado believes this lift in spending signals that households are “getting ready for a better year for the housing market,” particularly with interest rates remaining relatively low.
Labor Market Concerns and Consumer Confidence
Despite some positive signs, consumer confidence remains fragile. Delgado emphasized that households are still concerned about the labor market, with unemployment currently at 5.4%. Even though underlying details in the labor market are showing some strengthening, consumers tend to focus on the headline unemployment rate. Rising unemployment figures contribute to job insecurity, which in turn dampens spending. The softness of the housing market also plays a role, as a significant portion of household wealth is tied up in property values.
Though, Kiwibank economists remain optimistic about a potential recovery in consumer spending later in the year. They anticipate that as the broader economy improves, with a strengthening labor market and a more stable housing market, households will regain confidence and increase their spending. Delgado indicated that any interest rate rises should be delayed until 2027.
The current economic climate presents challenges for both consumers and businesses. The squeeze on household budgets, driven by rising utility costs and persistent inflation, is impacting spending patterns across various sectors. While some areas, like the housing market, show signs of resilience, overall consumer confidence remains cautious. Monitoring these trends and understanding the underlying factors driving them will be crucial for navigating the economic landscape in the coming months. The impact of inflation remains a key concern for households.
The next key economic indicator to watch will be the February transaction data, providing a clearer picture of whether the soft consumption trend observed in January is continuing.
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