Inflation
What inflation is, how it’s measured in New Zealand and how to manage its impact on your small business.
February 2024 | Published by Xero
Published Thursday 23 July 2026
Table of contents
Key takeaways
- Inflation is the rate at which prices for goods and services rise over time, which reduces the purchasing power of your money.
- In New Zealand, inflation is measured by the Consumers Price Index (CPI) from Stats NZ, and the Reserve Bank of New Zealand targets annual inflation of 1% to 3%.
- Inflation can lift the value of some assets, but it also raises your costs, squeezes your margins and can make borrowing more expensive.
- You can manage inflation by watching your margins, adjusting prices carefully and keeping a close eye on cash flow.
What is inflation?
Inflation is the rate of increase in prices over time, based on the average price changes of a selected set of goods and services. As inflation rises, each dollar you hold buys a little less than it did before.
Inflation comes from the interplay between supply, demand and the money supply in an economy, along with market-specific factors like the level of competition for particular goods and services. Some inflation is normal in a healthy economy, but it can be hard on small businesses when it climbs too quickly.
What is the inflation rate?
The inflation rate is the percentage by which prices rise over a set period, usually reported once a year. It gives you a single figure for how quickly the cost of living is changing.
Inflation is usually reported as one percentage for the whole economy, but prices don’t move at the same pace across the board. Energy prices might climb faster than food prices, for example. In New Zealand, the official measure of inflation is the Consumers Price Index (CPI), produced by Stats NZ.
How the inflation rate is calculated
You can work out the inflation rate for a good or service with a simple calculation. Subtract the old price from the new price, divide that result by the old price, then multiply by 100 to get the percentage increase.
The Reserve Bank of New Zealand monitors and manages inflation, so you can usually find the official rate there.
What causes inflation?
Inflation usually comes down to three main forces, and they often overlap in a real economy. Knowing what’s driving prices up helps you plan your own costs and pricing.
- Demand-pull inflation: prices rise when demand for goods and services outstrips supply, so buyers compete for what’s available
- Cost-push inflation: prices rise when the cost of producing goods and services goes up, such as higher wages, fuel or raw materials
- Built-in inflation: prices rise as businesses lift wages to keep pace with the cost of living, then pass those higher costs on to customers
How is inflation measured in New Zealand?
In New Zealand, inflation is measured by the Consumers Price Index (CPI), produced by Stats NZ. The CPI tracks the changing price of a fixed basket of goods and services that households typically buy, from groceries and rent to petrol and power.
The Reserve Bank of New Zealand uses this measure to keep inflation in check, targeting annual CPI inflation of 1% to 3%, with a 2% midpoint. According to Stats NZ, annual inflation was 3.1% in the year to March 2026, sitting just above that target band.
Why inflation matters to small businesses
Inflation shapes your costs, your prices and how much your customers can afford to spend. In some cases it can work in your favour: it can lift the cash value of assets like property or stock, and it can shrink business debts in real terms as the value of money falls.
More often, though, inflation creates pressure for small businesses:
- Passing rising costs on to customers can be difficult without losing sales
- Selling non-essential goods gets harder, because customers prioritise essentials over discretionary purchases as their spending power drops
- Borrowing can get more expensive, because central banks often raise interest rates to bring inflation down
Recent New Zealand data shows how these pressures play out. According to Xero Small Business Insights, a sharp rise in fuel prices in early 2026 began squeezing small businesses both directly, through higher fuel and input costs, and indirectly, as customers had less to spend on non-fuel goods and services. Xero Small Business Insights also noted that profit margins can’t absorb sharply higher fuel costs indefinitely, so rising transport costs tend to flow through to the price of goods and services across many industries.
How small businesses can deal with inflation
You can take practical steps to soften the impact of inflation and protect your margins. Building these habits into your regular planning, including your small business budget, makes it easier to ride out price rises.
- Cut costs where you can, such as switching to lower-cost suppliers, renegotiating leases or trimming any expense you don’t need
- Monitor your margins so you can see when your profitability is under threat, and adjust your pricing as needed
- Learn how to increase prices strategically, for example by offering loyal customers flexible payment terms so rises feel fairer
- Manage your cash flow, because credit costs more during inflationary times, so keep enough liquidity to avoid taking on extra debt
Manage your business through inflation with Xero
Inflation is part of running a business, but it doesn’t have to catch you off guard. With real-time reporting and cash flow tools in Xero, you can watch your margins, track your costs and make confident decisions as prices change.
See how Xero helps you stay in control when costs rise, and get one month free.
FAQs on inflation
Here are answers to some frequently asked questions about inflation and what it means for your business.
What causes inflation?
Inflation is usually driven by demand-pull, cost-push or built-in factors. It happens when demand outpaces supply, when production costs rise, or when wages and prices push each other up over time.
What is a good inflation rate in New Zealand?
The Reserve Bank of New Zealand aims to keep annual inflation between 1% and 3%, with a 2% midpoint. Low, steady inflation in that band is generally seen as a sign of a healthy economy.
What is the difference between inflation and deflation?
Inflation is when prices rise over time, while deflation is when prices fall. Deflation can sound helpful, but it often signals weak demand and can lead to lower wages and spending.
How does inflation affect small businesses?
Inflation raises your input costs and can squeeze your margins if you can’t pass the increases on. It also reduces what your customers can afford to spend, especially on non-essential goods and services.
Who controls inflation in New Zealand?
The Reserve Bank of New Zealand manages inflation, mainly by adjusting the official cash rate to influence borrowing and spending. Stats NZ measures inflation through the Consumers Price Index, but doesn’t set policy.
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.