Economists warn of a firmer inflation path as fuel costs bite
New Zealand consumer prices held flat in August, with rising fuel costs and international airfares offsetting a seasonal fall in accommodation prices, according to Stats NZ. But economists at ASB and Westpac say the underlying trend points to firmer inflation ahead, with annual CPI expected to hold above 4% into late 2026.
Airfares and fuel doing the heavy lifting
International airfares rose 4.3% in August compared with July, following a 10.9% increase the month before, according to Stats NZ. Annually, international airfares are up 21.5% – the largest annual increase since April 2023.
Stats NZ prices and deflators spokesperson Nicola Growden said "the monthly rise in international airfares was driven primarily by higher fares to Europe and Asia," adding that price changes collected months in advance are now flowing through to the August figures.
Petrol prices also climbed 2.0% over the month and are up 17.9% annually, with diesel prices up 8.6% month-on-month and 45.8% over the year.
Westpac senior economist Satish Ranchhod said fuel costs "have taken a further step higher in recent days as tensions in the Middle East have flared up again," even as domestic airfares and holiday accommodation costs came in softer than expected.
Underlying pressure building beneath the headline numbers
Overall monthly prices were flat in August, with the fuel and airfare increases offset by a seasonal 6.1% fall in accommodation costs. But ASB senior economist Mark Smith said the more telling signal sits beneath the surface: underlying prices, stripping out fuel and energy, have picked up pace over the past quarter, running at their fastest since January.
"There remains a tug-of-war between cost pressures and economic spare capacity in influencing the core inflation trajectory, but at present higher costs appear to be winning," Smith said.
Both banks now expect annual CPI inflation to hold above 4% into late 2026. ASB has pencilled in 4.2% by the fourth quarter, while Westpac expects a 0.7% rise in the September quarter (3.7% annually) – a touch below the Reserve Bank's own forecast of a 0.8% quarterly rise, though Westpac flagged some downside risk given the softer travel figures.
Rent prices, meanwhile, remain flat year-on-year – the lowest annual rate in decades, and one of the few genuine dampeners on non-tradable inflation.
A firmer inflation profile raises the risk that the Reserve Bank keeps monetary policy tighter for longer, with ASB maintaining its view that the OCR will peak at 3.25% by year end.
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