The cost of living is increasing. So what's behind it?

The cost of living is rising before our eyes.

Petrol - a key measure in calculating cost of living - went above $2.40 in many parts of the country for the first time, following a series of record highs hit in recent weeks.

And the prices won't stop there, with a 3.5c a litre excise tax coming to a pump near you from the start of October. When GST is factored in, the increase is expected to be more like a 4c a litre hike.

And it's not just petrol that has been hitting eye watering prices. The rising costs of a range of everyday living expenses is pushing up living costs in New Zealand.

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* Cost of living rising fastest for beneficiaries and Māori due to rent and cigarette hikes, Stats NZ says

* Hamilton's cost of living more expensive than Auckland, international index says

According to the Numbeo cost of living index the cost of living in New Zealand is 2.79 per cent higher than in United States.

GEORGE HEARD/STUFF Petrol prices have hit yet another record high.

How do we measure living costs?

There are two measures: Consumer price index (CPI), commonly referred to as inflation, and a more recent measure called the household living-costs price indexes (HLPIs).

Stats NZ is the government agency tasked with determining and publishing what New Zealand's cost of living is.

Historically Stats NZ gauged the cost of living using CPI, which measures the changing price of goods and services New Zealand households buy.

To calculate CPI it uses a fixed "basket" of hundreds of goods and services and measures how the prices change over time.

But Stats NZ said it received feedback that CPI did not reflect people's own experience of inflation, and in November 2016 it started measuring HLPIs as well as CPI.

The household living-costs price indexes look at inflation experienced by 13 different groups, including beneficiaries, Māori, superannuitants, and other groups of people who have varying income and spending patterns.

It is designed to be more meaningful for individual households as it reflects spending patterns of different groups in our society.

It feels like living costs are rising. Are they?

You bet.

Fuel, rent, insurance, rates, electricity, cigarettes and food; they're all increasing in price, and some as a direct result of Government policy.

Smoking, and fuel, have added taxes and landlords say they're increasing rents because rates and the Government's rental market reforms are driving up costs.

Stats NZ said in the June 2018 quarter the price of petrol rose 3.2 per cent, rent 0.7 per cent and electricity prices 1.7 per cent.

Beneficiaries faced the highest inflation with rent making up almost 30 per cent of household spending, Stats NZ said.

Inflation is the term used to describe a rise of average prices through the economy. When inflation rises, money loses its value.

Since 2014 CPI, or inflation, has been relatively flat sitting at 1 per cent every quarter (on average).

This is well below levels some New Zealanders will be used to with inflation averaging 2.4 per cent in the 1990s, and averages of over 11 per cent for the previous two decades.

That's all too technical, tell it to me straight

Living cost and inflation are like bread and butter for economists. They use it to make predictions around official cash rate movements, labour market statistics and consumer confidence.

SUPPLIED ASB economist Kim Mundy says people on the breadline tended to make sacrifices on necessary spending when the cost of living increases.

ASB economist Kim Mundy said the cost of living was rising, particularly for day-to-day expenses like rent, fuel and electricity

"These are the necessities that a household faces and it's harder to avoid some of these costs," Mundy said.

Prices for things people spent their discretionary income on, like technology, had been increasing slowly, and actually falling in some cases, she said.

"People tend to feel the impacts to changes to their living costs than the overall basket of goods."

It was important to gauge household living costs because that gives an indication of how different households were coping with different changes in costs, she said.

While government policy had resulted in some price rises, international factors were also to blame.

"There's a lot of different elements at play when break down why specific costs are rising or not."

For example, fuel prices had been impacted by a falling New Zealand dollar and rising oil prices.

"We're actually quite impacted by offshore influences just as much."

While household living costs were rising, they were also being offset by minimum wage rises and Working for Families packages increasing, she said.

"While we are seeing increases in household living costs we are also expecting to see people's incomes improving to a degree."

But its not all bad news.

Mundy also expected a tightening of the labour market to result in higher wages for workers, which would also offset the rising cost of living.