Inflation expected to plateau a little above 2%

Monday, 20 January 2025

Inflation is back in the box for now, but concerns linger over the impact of the falling dollar.

Bank economists are expecting Stats NZ will on Wednesday report that annual inflation was little changed from 2.2% during the final quarter of last year.

There should be little room for any big surprises in the quarterly data, given that it drips out information on price movements for many goods and services, such as food, rent and airfares, on a more monthly basis.

But financial markets are likely to be sensitive to any disappointments, given concerns that inflation and interest rates could settle somewhat higher later this year than the Reserve Bank has been assuming.

The central bank forecast in November that annual inflation would edge down to 2.1% in the December quarter, from the 2.2% rate it recorded in the year to the end of September.

New Zealand's inflation rate has dropped to 2.2%, the lowest in more than three years. Although prices are still rising, the pace has slowed. Lower prices for air travel, petrol, and vegetables helped, but rent and insurance costs have increased.

ASB and Westpac are also expecting inflation to inch down to that level, while ANZ and BNZ are both tipping that Stats NZ will show it treading water at 2.2%.

Compared to previous quarters, more of the increase in prices last quarter is expected to be attributable to tradeable goods — imports and other goods and services whose prices are largely determined by overseas markets.

ANZ expects so-called “non-tradeable” or domestic inflation, which is usually of more concern to the Reserve Bank, to fall to 0.8%, from 1.3% in the September quarter.

Senior economist Miles Workman said an inflation figure close to the Reserve Bank’s expectations was likely to leave a 50 basis point cut in the official cash rate to 3.75% on the table.

Looking ahead to this year, it was fair to say that recent weakness in the New Zealand dollar and stronger oil prices could see annual inflation “re-accelerate for a time”, he said.

“For the Reserve Bank that would become concerning if inflation expectations followed suit”, but it was common for tradeable inflation to be volatile, he said.

BNZ is tipping annual inflation to rise to 2.5% during the current quarter and stay at that level for nine months.

Westpac senior economist Satish Ranchhod said the underlying trend was inflation was looking much better contained than it had in a long time, with measures of “core inflation” drifting back towards the 2% mid-point of the Reserve Bank’s target band.

ASB senior economist Mark Smith foresees modest increases in tradeable prices this year, pushing overall inflation “slightly higher” by the end of the year.