Inflation is often discussed as a single headline number, but how price pressures are experienced by households depends heavily on what is getting more expensive. Although various breakdowns of inflation can help understand what’s driving inflation, the reality for households is often best seen in the difference between price increases for essential, unavoidable items and those for discretionary, optional spending.
Our latest analysis profiles the different trends, showing that the price of essentials is, unsurprisingly, increasing – and at a greater clip than discretionary items.
Essentials inflation outstrips discretionary inflation
There are various ways to break down the basket of goods that feeds into the consumers price index, including goods vs services, tradables vs non-tradables, and many other combinations. However, one group we think has been missing is the difference in pricing pressures for vital, necessary items, compared to more nice-to-haves. This breakdown offers an important view of the level of exposure that households face to inflation. Sure, there might be more discounts on furniture and electronics, but households might be avoiding buying those items as they struggle to pay for more expensive food. But you can’t usually decide that electricity or rent costs are optional. In fact, they’re inescapable.
Infometrics analysis of the difference in inflation rates for essential items, compared to discretionary items, shows a clear trend of essentials prices rising faster. Essentials inflation accelerated to 3.8%pa in the December 2025 quarter, the fastest rate since mid-2024. Although discretionary prices also rose, they remain at a more subdued 1.8%pa pace.
The increase in essentials costs were driven by larger gain in electricity prices, up 12%pa, gas prices, up 16%pa, various higher insurance prices, as well as meat and dairy prices.
Over a longer period of time, it’s clear that the essentials inflation is both more volatile and generally higher than discretionary inflation. Over the last 20 years, essentials inflation has averaged 3.2%pa, compared to 1.8%pa for discretionary items.
Those figures also underscore current challenges. Although discretionary pricing pressures are around long-term averages, essentials pricing pressures are above long-term averages and still accelerating.
What’s essential and what’s discretionary?
We’re turned to some analysis in 2020 by the Australian Bureau of Statistics (ABS) to determine the list of essential vs discretionary costs (termed “non-discretionary” and “discretionary” by the ABS).
As they note, “deciding whether a good or service meets a basic need (non-discretionary) is somewhat subjective and will differ across households.” Given the New Zealand and Australian inflation baskets are similar in form and set-up, we have aligned our analysis with the ABS definition, at the CPI component level (with around 90 components feeding into this analysis).
Essential items are those that meet a basic need, are required to maintain current living arrangements, or are a legal obligation. Discretionary items are those that are more optional purchases. Vegetables are an essential item, whereas confectionary is discretionary.
