Inflation inches above Reserve Bank’s target band, climbing to 3.1%

Friday, 23 January 2026

Finance Minister Nicola Willis has suggested the Reserve Bank could choose to “look through” some price rises reported by Stats NZ today, but said it was ultimately up to the bank to decide what was needed to keep inflation on track.

Stats NZ reported annual inflation rose to 3.1% in the three months to the end of December, pushing it clearly above the top end of the Reserve Bank’s target band for the first time since June 2024.

More expensive international airfares were the biggest contributor to inflation in the quarter, but higher petrol and electricity prices were also partly to blame.

“While the annual inflation rate has slowed considerably since its most recent peak of 7.3% in the June 2022 quarter, it has increased each quarter since the December 2024 quarter, when it was 2.2%,” the head of Stats NZ’s inflation team, Nicola Growden, noted.

Inflation had been recorded at 3.046% in the previous quarter, but Stats NZ rounded that down to 3% in its official reporting.

Growden explained it didn’t highlight the smaller decimal places as that would imply Stats NZ could pinpoint inflation at a greater level of accuracy than was actually possible.

Labour leader Chris Hipkins said that when inflation reached 3%, Willis had confidently predicted that was the peak.

“It turns out that wasn’t the peak. A year ago, the Government started saying we had turned the corner and the economy was recovering, and things got worse — the economy shrunk.

“Every time this Government says everything is about to get better, it gets worse.”

Willis said inflation remained “a lot lower than it was” and she had confidence in the Reserve Bank to deliver on its mandate of keeping inflation under 3% over the medium term.

“There is always some volatility in these quarter-to-quarter figures.”

Some of the factors in the inflation rise, the Reserve Bank might “look through as ‘temporary’ or transitory factors”, she said.

“But it is up to them ultimately to decide what’s needed to keep us on track on inflation,” she said.

Infometrics principal economist Brad Olsen said inflation was moving in the wrong direction. “Although there are reasons for some of these increases, the continued acceleration in inflation, despite clear spare capacity in the economy, should start to raise concerns at the Reserve Bank,” he said.

BNZ research head Stephen Toplis voiced concern that Stats NZ had reported more than 80% of good and services it tracked had increased in price over the past year.

“We are concerned that, as the economy grows, the mismatch in skills between those unemployed and those needed will put upward pressure on wage rates, especially if weak net immigration continues to limit the supply of labour,” he said.

The Reserve Bank forecast in November that the annual inflation rate would drop to 2.7% in the December quarter, but it had since become clear that was overly optimistic.

Bank economists last week predicted the rate would come in at about 3%, with ASB correctly tipping the 3.1% rate and BNZ predicting 2.9%.

The Reserve Bank indicated in November that it saw no reason then to assume it would need to raise the Official Cash Rate (OCR) from its current level of 2.25% before next year.

But economists have increasingly been tipping that rates will need to move higher, sooner, while also cautioning that tightening too soon could threaten to snuff out the economic recovery that is widely assumed to have just started in earnest.

The general assumption has been that inflation will still trend down, but this quarter’s small miss could add to the pressure for monetary tightening if the Reserve Bank assesses it is likely to spook consumers and businesses and feed through into their expectations of future inflation.

Capital Economics economist Abhijit Surya said it was “a little premature to be talking about rate hikes given core inflation remained well behaved”.

But said he wouldn’t be surprised if investors remained in a hawkish mood. At the moment, the market was pricing in a 50 basis point rise in the OCR to 2.75% by the end of the year, he noted.

Like Toplis and Olsen, Westpac senior economist Satish Ranchhod appeared less forgiving, observing progress reducing core inflation had been arrested.

“Several core inflation measures picked up and are sitting in the upper part of the Reserve Bank’s target band,” he said.

Ranchhod expected the Reserve Bank would bring forward the expected date of rate rises, “but not to the extent where OCR increases in the first half of 2026 are on the cards”.

ANZ senior economist Miles Workman said last week, ahead of the inflation result, that there would be a very high bar on the central bank doing anything other than keeping the OCR on hold when it releases its next monetary statement on February 18.

But he said the risk of rates rising earlier than next year had increased.

Adding to the threat of higher interest rates, the Reserve Bank’s Nowcast forecasting tool was on Thursday predicting economic activity would jump by a solid 2.3% in the six months to the end of March as a cyclical recovery took hold.

Until last month, the tool had been indicating much more modest GDP growth of 1.5% during the six-month period. Most of the heightened optimism was based on the results of surveys, rather than harder economic data, however.

So-called non-tradable or “domestic” inflation, which measures the changes in prices of goods and services whose prices are largely determined in New Zealand, stayed at the annual rate of 3.5% in the December quarter, unchanged from the previous quarter, Stats NZ reported.

That is the first time in almost three years that rate has not declined.

Tradable inflation, which records the price changes of imports and other goods and services whose prices are largely set by international markets, rose to 2.6%, from 2.2% previously.

As previously announced by Stats NZ, electricity prices rose 1.5% in the month of December and by 12.2% over the year as a whole.

That was despite a big jump in the proportion of electricity that could be generated using low-cost hydro power in the second half of last year.

“Annual electricity increases remain at their highest since the late 1980s, when there were several major reforms in the electricity market,” Growden said.

The proportion of electricity generated from renewables has been hovering around 97% over the past few months, thanks mainly to very strong hydro lake inflows, and reached a record of more than 98% in the three weeks to January 11, according to Transpower.

Asked to comment last month on why the favourable conditions had not flowed through to lower retail electricity prices, Energy Minister Simon Watts said they “operated over a longer period of time”.

“But I think everyone will be looking at a lower price of energy,” he said, encouraging consumers to “shop around”.

A spokesperson for Meridian Energy, the country’s largest generator, said last month that residential prices were based on medium term modelling. “We don’t change residential prices based on short term hydrology,” they said.