Inflation data delivers ‘green light’ for rate cut, but food prices cause concern

Food price inflation remains a concern, but at the core of the New Zealand economy, it continues to ease.

Stats NZ Consumers Price Index data for the year to June showed the annual inflation rate rising to 2.7% – the highest level in 12 months.

But quarterly inflation was just 0.5%, lower than most economists expected.

“We think an August cut is now as close to a done deal as can be the case,” BNZ head of research Stephen Toplis said.

The most interesting aspect of the CPI numbers was the downward pressure on prices related to weakness in the residential property sector, he said.

“Home ownership (otherwise known as building costs) fell 0.1% in the quarter to be up just 0.8% for the year,” he said.

“The last time annual building cost inflation was this low was in the depths of the GFC and, before that, the 1998/1999 recession.”

Weak building costs also flowed through to property maintenance which experienced 1.4% annual inflation, he said.

There was annual deflation for furniture, furnishings and floor coverings, household textiles and household appliances.

But the really worrying thing was that the cost of essentials was rising far faster than the remainder of the CPI, he said.

“There are a lot of ways that you can cut this but we reckon the things that are most essential are food, accommodation and energy (electricity, gas and petrol).”

“Our very back-of-the-envelope “essentials index” shows the cost of essentials rising at around twice the pace of the remainder of the CPI.”

The biggest concern was that food price inflation had accelerated to an annual 4.2% following a 1.6% quarterly increase, he said.

As well as being a significant hardship for a large portion of the population, this was adding to the headwinds for the economic recovery.

“If GDP is to pick up meaningfully then household consumption has to rise. With effective real disposable incomes under so much pressure there is very little chance of an increase in real spending.”

BNZ’s early forecast for the current quarter was for prices to rise 0.8% in the quarter, taking the annual rate to 2.9%.

Other economists have forecast the third quarter rate to rise above the upper limit of the RBNZ’s 1-3% target range.

“We also acknowledge that there is some upside risk to this,” Toplis said.

“But the good news is that we believe that will be the peak with annual inflation back near the midpoint of the RBNZ’s target band by this time next year.”

A key assumption was that food price inflation would soon abate, he said.

“New Zealand commodity price inflation is already past its peak and this is normally a forerunner to domestic prices, particularly for food. There is even a chance that food prices outright fall.”

BNZ also assumes further falls for petrol prices drift lower.

With the economy continuing to perform below capacity, there would be continued downward pressure on non-tradeable inflation, he said.

KiwiBank senior economist Mary Jo Vergara noted that tradeable inflation was on the rise.

Mary Jo Vergara, Kiwibank economist. Photo / Supplied

“We’re no longer importing deflation,” she said.

Annual tradeables inflation lifted from 0.3% to 1.2%.

“The 4.2% increase in food prices accounted for 28.5% of the lift in headline inflation,” she said.

“Domestic inflation, in contrast, continues its (slow) move south.”

Annual non-tradeables inflation fell below 4% for the first time in four years to 3.7%.

“Domestic inflation had fallen some way from its 6.8% peak in 2023, but it was still sitting high above the long-term average (around 3%).

“And that’s despite such a weak domestic economy.”

The persistence was due to lingering strength in “administered prices” such as rates, insurance costs and power.

Annual council rates and insurance costs were running well above historic averages, up 12.2% and 6%, respectively, she said.

Households were also contending with high electricity charges, climbing to 9.1% annually.

“Given excess capacity still sloshing in the economy, domestic inflation should continue to head lower. But the pace of easing is being dictated by factors largely outside of the RBNZ’s control,” Vergara said. “That’s a frustration.”

Overall, the data added to the case for another OCR cut in August and suggested risks were tilting towards further easing being delivered sooner than previously expected, ANZ senior economist Miles Workman said.

“We have long been expecting the RBNZ will need to cut the OCR more than they have recently been signalling,” he said.

“With [this] data not the roadblock we thought it was going to be, the risk of a follow-up cut in October is now looking higher.”

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.