Households are being hit with a projected $55-a-week surge in living costs this year, driven in part by instability stemming from the Middle East conflict, according to ASB economists.
In a report, the bank warned that the cost of living will be 50% higher than it might normally have been. This sharp increase is being fuelled not only by direct rises in fuel costs, but also by the ripple effect pushing up the price of everyday goods and services.
ASB chief economist Nick Tuffley signalled a clear setback to economic recovery expectations, stating: “Overall, the recovery in household consumption we had pencilled in for 2026 now looks to be a 2027 story.”
He pointed to uncertainty tied to the conflict.
“Our central assumption is that the conflict lasts for three months, and that the price impacts last another three months.”
The report found that rising fuel costs alone are expected to add $16.50 a week directly to household expenses—an especially heavy burden for rural communities, which depend more heavily on diesel-powered private transport and are therefore less insulated from global energy shocks.
Faced with mounting financial strain, households are expected to tighten their belts and prioritise essentials.
“Typically, during times of financial pressure, households prioritise essential purchases such as groceries, food and beverages, and pharmaceuticals, while reducing spending in other areas.”
“This shift in spending patterns is expected to partially offset the overall increase in household expenses.”
The report assumes the conflict will last roughly three months through to mid-year, with the most severe economic impact expected over the next six months before any rebound begins in the final quarter.
The consequences are not limited to households. Weakening domestic demand is expected to ripple across the wider economy, raising further concerns about economic resilience.
“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 slowdown is also expected to weigh on house prices and job creation, which are key indicators of economic strength.
The temporary increase in the base rate of the in-work tax credit, affecting about 143,000 families, is expected to have only a modest impact in offsetting the broader cost pressures.
The report highlights the difficult position facing the Reserve Bank, as policymakers are forced to navigate competing economic pressures.
“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.”
ASB is maintaining its forecast of a 25 basis point rise in the official cash rate in December to 2.5%.
However, it warned that the Reserve Bank may be forced to act sooner and more aggressively if medium-term inflation pressures persist.