Consumers Price Index inflation falls to 2.2%: Why it didn’t slow down even more

Inflation fell in the September quarter to its lowest rate in more than three years – and if not for rent rises and council rates, the price slowdown would have been even more dramatic.

Inflation fell to 2.2% year-on-year, well below the June quarter and also slightly below consensus forecasts of 2.3%.

The 2.2% annual increase in the Consumers Price Index (CPI) is down from a 3.3% annual increase in the June quarter.

Imported (or tradeable) inflation fell 1.6% for the year. While domestic (non-tradeable) inflation remained elevated at 4.9% it was lower than many economists had forecast.

“For the first time since March 2021, annual inflation is within the Reserve Bank’s target band of 1% to 3%,” Stats NZ consumer prices manager Nicola Growden said.

“Prices are still rising, but not as much as previously recorded.”

Higher rent prices were the biggest contributor to the annual inflation rate, up 4.5%.

Almost a fifth of the 2.2% annual increase in the CPI was due to rent prices.

Council rate increases also pushed inflation up, as prices for local authority rates and payments increased 12.2% in the year to September 30.

Across all regions, there were a range of local authority rate increases, some higher than 12% and some lower, Growden said.

Cigarette and tobacco prices also increased, up 10% year-on-year.

Those increases were mainly due to the annual tobacco excise tax increase on January 1, 2024, Stats NZ said.

Finance Minister Nicola Willis said the era of crushing inflation was over. Photo / Mark Mitchell

But lower petrol prices, which fell 8%, helped offset price rises elsewhere.

Prices for vegetables also fell - down 17.9%. This decrease follows high prices for potatoes, kūmara, and onions last year.

The New Zealand dollar weakened a touch to US60.70c from US60.80 ahead of the release.

Core inflation, excluding volatile sectors such as energy and seasonal food, was 3.1%.

“The era of crushing price rises is now over,” Finance Minister Nicola Willis said soon after the data release.

“There is more work to be done to get the economy growing, but New Zealanders can be confident we are headed in the right direction.”

Back in ‘victory’ range?

“Pay rises are finally running above inflation,” Kiwibank economists said.

“The cost of living crisis is coming to an end, slowly. It may not feel like it, yet, but inflation has eased, and will ease further.”

The Kiwibank economists said the Reserve Bank (RBNZ) engineered “a long, harsh recession” to get inflation back within its 1%-to-3% target band.

“The RBNZ can declare victory in the war on inflation. And they have acknowledged the success, with rate cuts.”

The central bank last week cut the Official Cash Rate (OCR) from 5.25% to 4.75%.

“The light at the end of the tunnel is burning brighter. Cost pressures are easing,” Kiwibank added.

Falling inflation would help household budgets, and business operating expenses.

Reserve Bank Governor Adrian Orr. The 2.2% increase put inflation back inside the central bank’s mandated target band. Photo / Mark Mitchell, NZME graphic

Imre Speizer, head of New Zealand strategy at Westpac, said the quarterly 0.6% rise was a touch weaker than the market had expected.

”If you look under the hood, there is some mixed stuff there, but there is probably more softer stuff than stronger stuff.”

Meanwhile, the odds of a 75-basis-point (bps) cut in the Reserve Bank’s OCR at its next opportunity on November 27 seem to be increasing.

Overnight indexed swaps showed a 100% chance of a 50bps cut, but also showed a 35% chance of a 75bps cut in November.

The 2.2% increase put inflation back inside the Reserve Bank’s mandated target band and nominally meant victory in the central bank’s battle using high interest rates to bring inflation down.

ANZ economists predicted a quarterly rate of 0.8% for a 2.3% annual rate. Inflation quarter-on-quarter turned out to be 0.6%, slightly up from the June quarter’s 0.4% increase.

Westpac and ASB expected a 0.7% rate for an annual rate of 2.2%.

Westpac senior economist Satish Ranchhod said there were risks on both sides in terms of inflation forecasts.

“On the downside, the downturn in consumer spending could be an even larger drag on the prices of retail goods and some services.

“However, there is also a chance we see continued strength in the prices of items like insurance and rates, which have contributed to stronger-than-expected non-tradeable inflation over the past two years.”

ANZ senior economist Miles Workman sounded a note of caution around elevated domestic inflation.

“Headline CPI inflation falling back into the 1%-3% band may represent a key psychological threshold for policymakers and RBNZ watchers. But should the RBNZ break out the bubbly now annual inflation has a two-handle?” he said.

“We hate to be party poopers, but non-tradeable inflation is still way too high, meaning if the sound of corks popping does resonate through the RBNZ building next week, they’ll be celebrating global disinflation progress just as much as their own. Domestic disinflation does appear poised to continue, but there’s still a way to go.”

Non-tradeable inflation measured final goods and services that did not face foreign competition and was an indicator of domestic demand and supply conditions.

But the inputs of these goods and services can be influenced by foreign competition.

Stats NZ described tradeable inflation as that which measured final goods and services influenced by foreign markets.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.