Inflation has failed to budge, with fears of ‘reacceleration’

Wednesday, 22 January 2025

Christopher Luxon reflects on his government's first year, citing progress on lowering inflation, cutting OCR, and supporting Kiwis through tax relief, childcare funding, and healthcare investment.

Annual inflation remains at 2.2%, unchanged from previous quarter.

Economists expect inflation to rise to 2.5% by the end of 2025.

A lower NZ dollar could push up prices of imports.

Despite economists expecting annual inflation to drop to a four year low, it failed to budge, and there are fears a “reacceleration” could be on the cards later this year.

Consumers Price Index (CPI) data released by Stats NZ on Wednesday showed inflation had increased 2.2% in the December 2024 quarter, compared with the same quarter in 2023.

The 2.2% annual increase followed the 2.2% annual increase in the September 2024 quarter. Meanwhile, quarterly inflation was 0.5% in the December quarter, compared with the three months to September.

Infometrics chief executive Brad Olsen said despite headline inflation remaining at 2.2% per annum, there were still “a few pockets of concerns” in the data around renewed pricing pressures.

“Tradable inflation rose in the quarter, compared to the Reserve Bank’s expectations of a drop, and imported inflation concerns are likely to be larger going forward given the weaker currency makes imports more expensive,” he said.

“There’s more caution over the idea there could be a reacceleration of inflation on the cards, particularly from overseas pressures. That doesn’t mean interest rate cuts are over, but it’s more evidence that we might be closer to the low point for interest rates than many think.”

ASB senior economist Mark Smith said he expected annual CPI inflation to remain close to the inflation target midpoint over early 2025 but said it would edge higher, ending the year at around 2.5%.

“The key swing variable is for tradable goods and services prices, which are expected to move from a modestly deflationary impulse over 2024 to a mildly inflationary impact over 2025.

“The lower NZD/USD and higher oil and food commodity prices point to modest 2025 lifts. The impact of new Trump tariffs could potentially add more to inflation, but we will have to wait and see as the impacts on NZ inflation could be ambiguous.”

Westpac senior economist Satish Ranchhod.

He also expected annual non-tradable inflation to approach 3% by the end of the year, reflecting a generalised cooling in services and housing-related inflation drivers.

“Cooling non-tradable inflation increases our confidence CPI inflation will remain well below 3% over 2025, paving the way for additional OCR cuts.

“Another 50bp OCR cut in February looks to be warranted as the RBNZ reduces pressure on the monetary policy brakes. We also envisage a further 50bp of cuts in Q2 of 2025.”

Westpac senior economist Satish Ranchhod said despite the annual inflation rate remaining unchanged at 2.2% , it was much lower than the levels we saw in recent years and comfortably within the RBNZ’s target band.

“Importantly, while the December quarter did see large increases in some specific areas, price and cost pressures more generally have continued to ease,” he said.

“Overall inflation is close to 2%, and both core and domestic inflation are easing. In addition, economic activity was softer than expected through the latter part of last year. Against that backdrop, we expect that the RBNZ will deliver another 50bp cut when they next meet in February.”

Ranchhod expected inflation to remain “well contained” over the next year.

“However, the risks for inflation aren’t all to the downside, especially given the rocky global environment and downside risk for the New Zealand dollar. That will be an important area to watch over the coming year if inflation is to remain close to 2% on a sustained basis.”