Introduction to Inflation
Annual inflation, as measured by the consumers price index (CPI), has reached 3.1% in the December quarter, slightly exceeding the Reserve Bank’s 1% to 3% inflation target range. This rate has slowed down considerably since its peak of 7.3% in the June 2022 quarter but has been increasing each quarter since the December 2024 quarter, when it was 2.2%.
Breakdown of the CPI Basket
The 12 months to the December 2025 quarter saw a larger proportion of smaller annual price increases within the CPI basket and fewer annual price decreases compared to the previous 12 months. More than 80% of the CPI basket increased in price over the past year, which is the highest proportion of increases recorded in 18 months. Over half of the CPI basket increased in price by 3.0% or less.
Top Contributors to Inflation
The increase in the latest annual inflation figure was driven by electricity, rent, and local government rates and payments. Electricity was up 12.2%, contributing 10.3% to the latest annual inflation figure. Rent was up 1.9% and contributed 6.9% to the latest annual inflation figure, while local authority rates and payments went up 8.8%, contributing 8.7%. Other contributors to the annual CPI increase included meat and poultry, which went up 8.2%, overseas accommodation, which increased 9.1%, milk, cheese, and eggs, which increased 9.8%, and telecommunication services, which went up 7%.
Non-Tradeable Inflation
Non-tradeable annual inflation increased 3.5% with higher prices recorded for electricity, which was up 12.2%, and local authority rates and payments, which jumped up 8.8%. Lower prices were recorded for pharmaceutical products, which dropped 9.4%, and domestic air transport, which decreased 7.7%.
Tradeable Inflation
The latest CPI figures show annual tradeable (imported) inflation went up 2.6%. Higher prices were recorded for meat and poultry, which jumped 12.1%, and overseas accommodation, which went up 9%. These were partly offset by audio-visual equipment, which fell 18.6%, and games, toys, and hobbies, which went down 5.8%.
Other Notable Changes
Insurance saw an overall annual increase of 2.4% with health insurance jumping 20.3%. Dwelling insurance saw a jump of 2.0% while contents insurance jumped 5.2% and vehicle insurance saw a 3.2% decrease. Milk, cheese, and eggs saw a 9.8% annual increase. Coffee, tea, and other hot drinks saw a 12.3% annual increase.
Impact on the Economy
The Reserve Bank (RBNZ) had expected inflation for the December quarter to be 2.7%, but this was projected before more recent data was available. The RBNZ is tasked with maintaining inflation between 1% and 3% and specifically targets 2%. Its next Official Cash Rate (OCR) decision will be on February 18, and financial markets are expecting the OCR to be on hold.
Quarterly Increase
The CPI increased 0.6% in the December quarter, compared with the September 2025 quarter, which had a 1% increase. Higher prices for international air transport were the largest contributor to the quarterly inflation rate, which was up 7.2%. The increase in international air transport prices contributed one-fifth of the 0.6% quarterly CPI increase.
Conclusion
In conclusion, the latest inflation figures show that annual inflation has reached 3.1%, slightly exceeding the Reserve Bank’s target range. The increase was driven by electricity, rent, and local government rates and payments. Non-tradeable inflation increased 3.5%, while tradeable inflation went up 2.6%. The RBNZ will be keeping a close eye on price setting behavior and world dynamics, which could influence how the OCR moves. With the next OCR decision on February 18, it will be interesting to see how the RBNZ responds to the latest inflation figures.
