Bernard Hickey: Wallets close as we reel from bill shock

It's as if the New Zealand economy has just been overseas on holiday and has received a giant bill through the mail for data charges on its mobile phone.

The telecommunications industry describes this phenomenon as "bill shock". Upon receiving the bill, the customer then cancels their phone subscription.

And over the past six months, New Zealand has just received an economy-wide bill shock. As if out of the blue, prices for many everyday items just went up. It may not be reflected in the inflation figures yet, but consumers are reeling from the impact.

It's the feeling you get when you see the price of petrol has risen over $2.15/litre, but it doesn't really register until the price to fill the tank jumps over $100. It's the feeling you get when you haven't bought a particular brand of bread or milk for a while and suddenly it costs $1 more.

That bill shock feeling hit me when my morning cup of coffee jumped 14 per cent from $3.50 to $4. Conventional economics says I should slide along the demand curve and instead buy four cups for $16 rather than my previous five cups a week for $17.50.

But that's not how I reacted.

I simply stopped buying coffee from the cafe. Now I drink instant. The shock of the big jump, rather than a dribbly, little increase, forced me to re-evaluate my spending on this "luxury" altogether. The combination of the higher coffee price and the cost of a tank of petrol going over $100 was my personal bill shock.

But I'm not the only one. The GST increase in October started it, but it is the price increases in February and March that have chilled the air around wallets. The earthquake in Canterbury has snapped many wallets shut. Consumer confidence figures this week showed a slump to levels not seen since the worst of the global financial crisis.

Many realise prices are about to go up again. Prime Minister John Key has already warned the EQC levy will triple to $180 per insurance policy.

Construction costs are expected to surge after the earthquake. Rents in areas with short supply and overrun by Christchurch refugees are rising.

Many households will take any windfall from lower floating mortgages and pay off debt.

New Zealand is learning all about inflation again.

At current levels people are sitting on their hands. The more dangerous level is if inflation vaults beyond 5 per cent towards 10 per cent. Most see that as unlikely unless the oil price sprints towards US$200/barrel ($276) and the inflation fires in China and India spread to the developed world.

But if it does, all bets are off. Some may choose instead to spend and borrow now and let inflation reduce the value of their debts. That would be a deeply unsettling new type of bill shock for savers and banks - one New Zealand has not seen since the 1980s.