Inflation maintains status quo in latest figures

Result cements decision for February cut – economist

Inflation maintains status quo in latest figures

The annual rate of inflation is unchanged, latest Statistics New Zealand figures show.

Consumer Price Index (CPI) figures, released on Wednesday morning, show that inflation rose by 2.2% over the December quarter, the same level as recorded over the September quarter.

It remains at the lowest level since the March 2021 quarter, when annual inflation clocked in at 1.5%, and continues to sit within the Reserve Bank target band of 1% to 3%.

On a quarterly basis, inflation reached 0.5%, similar to 0.6% over the previous quarter. Domestic (non-tradeables) inflation was 4.5% over the year to December (0.7% over the quarter), representing a slight fall compared to 1.3% over the previous quarter.

Westpac chief economist Kelly Eckhold (pictured above right) said that the quarterly and annual inflation figures were close to what the bank had forecast, and that New Zealand was now through the period of rapid disinflation.

The biggest contributors to the annual rise were international air transport (up 6.6%), contributing 23.3% to the quarterly rise. Over the quarter (September to December), prices for second-hand cars rose 4.7% and rentals were up by 0.8%.

Vegetable prices were down 11.5% over the quarter, contributing to a 33% decline across all groups, and prices for confectionery, nuts and snacks were down 3.7% (contributing to a 11.6% decline overall).

Statistics New Zealand prices and deflators spokesperson Nicola Growden (pictured above left) said that the latest figures demonstrated a second consecutive quarter of prices being within the RBNZ target band.

She noted that the figures were in sharp contrast to the June 2021 and June 2024 quarters, when annual inflation was significantly above its target.

 “Prices are still rising, but not as much as previously recorded. The most recent peak was in the June 2022 quarter when the annual inflation rate reached 7.3%,” Growden said.

Rent prices biggest contributor on annual basis

Rent prices were up 4.2% over the year, representing almost a fifth of the annual increase of 2.2%. Growden said that figures showed rent prices continued to grow “at a consistent rate”.

Local authority rates increased 12.2% over the year, representing 16% of the annual increase.

Petrol prices help to offset rises

Petrol prices were down 9.2% over the year, Statistics NZ having noted that removal of the Auckland regional fuel tax (10c per litre plus GST) was a factor.

Growden said the price fall made a “significant contribution” to the slower increase in annual inflation, noting that between the December 2023 and December 2024 quarter, the weighted average price of 1 litre of 91 octane fell 26c, from $2.81 to $2.55.

Will inflation fall further?

Eckhold said that the December figures showed inflation was steady and that core inflation measures were “heading back to target”

He noted some idiosyncrasies in the data, with domestic inflation being slightly lower, while tradeables inflation came in slightly higher and said that the composition of inflation would likely shift.

“The headline inflation rate looks set to remain somewhere around 2%...it could be as low as 1.7% or 1.8% or as high as 2.2% or 2.3%,” he said.

“Our forecasts don’t suggest much change – we’ve gone through that period of rapid disinflation and now we’re hovering around the middle of the target range.”

He acknowledged that there was still room for domestic (non-tradeables) inflation to come down, which he said should occur over 2025, bringing it closer to 3%.

“Until recently, it’s been sitting closer to 5% or above...but on the other side, we’ve seen imported tradeables inflation be in deflation for a while.”

“That’s probably going to track up a little as things like the exchange rate, higher petrol prices and potentially some higher trading goods prices internationally might start flowing through as well.”

For consumers, Eckhold said this meant prices for services such as a plumber or electrician would continue to even out, rather than run above average, as had been the case previously.

“There’s still a few big ticket items (like rates and insurance) with some upward pressure, while insurance costs are expected to continue to come off,” he said.

Figures cement likelihood of February rate cut

Eckhold said that Westpac continued to forecast a 50bp cut to the official cash rate in February. December inflation, along with other supporting data, indicated that the central bank would “continue to be comfortable” with that level of cut, as previously signalled.

The bank continued to forecast a ‘neutral cash rate’ of 3.75%, occurring after the February cut, slightly higher than the Reserve Bank forecast of 3%.

“We’re currently forecasting two further 25 basis point cuts after February, taking the OCR down to 3.25%”.

With President Donald Trump assuming office from February 21, Eckhold said he anticipated a degree of volatility, noting that downward pressure on the exchange rate would continue to impact the prices of trading goods.

“You’ve got things like tariffs and potentially counteracting tariffs going around the world,” Eckhold said.

“On the one hand the NZ Dollar could be a bit weaker which would put some prices up, on the other hand there will be some categories of manufactured goods that could be directed in this direction, so we might get some cheaper things as well.”

The Consumer Price Index (CPI) survey measures how price changes affect the average consumer, recording the quarterly and annual price change.

What is your view on the latest inflation figures? Share your thoughts in the comments section below.