Inflation in New Zealand: Understanding the Current Trends
The upcoming release of the December quarter Consumers Price Index (CPI) figures by Statistics NZ on January 23 is expected to provide insights into the current state of inflation in the country. The previous quarter’s CPI showed an annual inflation rate of 3.0%, up from 2.7% in June. This increase has led to a re-evaluation of forecasts by major bank economists, who now predict a figure of 3.0% for the coming quarter, although some expect it to be slightly higher.
Recent Inflationary Pressures
The recent release of Selected Price Index (SPI) figures, which account for around 47% of the CPI ingredients, showed higher-than-expected inflationary pressures. This has resulted in a tweak of forecasts by major bank economists, who now expect the CPI figure to be higher than initially predicted. The Reserve Bank of New Zealand (RBNZ) had forecast a 2.7% figure, but this was made in November before more recent information was available.
The Role of the Reserve Bank
The RBNZ is responsible for achieving inflation between 1% and 3%. In the wake of the pandemic, inflation rose to a peak of 7.3% in June 2022, prompting the RBNZ to increase the Official Cash Rate (OCR) from 0.25% to 5.5% by May 2023. This led to higher mortgage rates, which in turn crimped spending and ultimately resulted in a recession. However, inflation has since decreased, falling to 2.2% in the September 2024 quarter.
Current Inflation Trends
The big drops in inflation seen in 2024 were driven by tradable inflation, while domestically generated inflation was slower to react. Although domestic inflation has continued to fall, it has not done so as quickly as expected. Shoppers can point to the fact that annual food price inflation was still running at 4.0% as of December. Furthermore, tradable inflation has started to firm up, with petrol prices rising notably.
Expectations from Major Bank Economists
Kiwibank’s economics team expects 3% annual inflation, driven by increases in volatile items such as petrol, airfares, and accommodation. However, they believe that underlying inflation will continue to follow a downward path, with spare capacity in the economy leading to further cooling in domestic inflation. ANZ senior economist Miles Workman also expects a 3.0% figure, stating that the RBNZ will be cautious due to stronger inflation but will not change the OCR unless there is a significant surprise. ASB senior economist Mark Smith predicts a 3.1% inflation figure, driven by climbing tradable inflation and slowing domestically generated inflation.
Implications for the Official Cash Rate
The RBNZ’s next OCR review is on February 18, which will provide clues on what to expect from new Governor Anna Breman. Financial markets currently expect the OCR to be on hold in February, but market pricing suggests that the OCR may start to move up again in the September quarter of this year. Any significant surprises in Friday’s inflation figures could lead to changes in market pricing.
Conclusion
In conclusion, the upcoming CPI figures will provide valuable insights into the current state of inflation in New Zealand. While major bank economists expect a figure of around 3.0%, there is a risk that it could be higher. The RBNZ will be closely watching the figures, and any significant surprises could lead to changes in the OCR. With further falls in the OCR now seeming off the table, the focus will be on whether the RBNZ will keep the OCR on hold or start to increase it again.
