Inflation has peaked: Why economists believe the worst is behind us

• Annual inflation rose to 3% by September 30, the highest in 15 months.
• Tradable inflation was 2.2%, while non-tradable inflation slowed to 3.5%, aligning with forecasts.
• Economists expect inflation to fall below 3%, with underlying disinflation and economic softness continuing.

The Reserve Bank should be able to stay relatively relaxed about inflation risk, despite the Consumers Price Index landing as close to its mandated upper limit as possible without breaching it, economists say.

At 3% annual inflation for the year to September 30 was the highest it has been for 15 months.

It was up from 2.7% in the year to June 30.

“Higher tradeable inflation more than offset ongoing but gradual non-tradeable disinflation,” said ANZ senior economist Miles Workman.

Tradeable inflation (largely determined by global factors, including movements in currency) came in at 2.2%.

Non-tradeable inflation (largely driven by domestic factors) slowed 0.2% points to 3.5%, in line with the forecast from the Reserve Bank of New Zealand (RBNZ), Workman said.

“While there were parts of the CPI that suggest the RBNZ can’t completely relax about current elevated inflation pressures, it’s important to note that the acceleration in annual headline inflation was driven by the volatile tradeable side of the basket,” he said.

“And that the lacklustre state of economic momentum implies there is plenty more underlying disinflation in the pipeline.”

A number of the biggest culprits in the September quarter figures are unlikely to repeat.

Power prices, which rose 11.3% (the biggest annual rise in 36 years), included a regulated charge for distribution costs that is passed on every five years.

Wholesale prices have also reduced significantly in the last couple of months.

The annual rate of increase for food was 4.6%.

But last Thursday’s Selected Price Index showed food prices have started to ease in the past month as international commodity prices fall back from peaks.

Local authority rates are calculated and added to the CPI in the September quarter every year. While they were still elevated at 8.8% for the year, that was down from a 12.2% increase in September 2024.

Westpac senior economist Satish Ranchhod noted “continued softness in the two big housing categories” – rents and the cost of purchasing a newly built home, which together account for around 20% of the CPI.

“Rents were up just 0.3% in the September quarter,” he said.

“In annual terms, rental inflation has slowed to 2.6%, the lowest it’s been since 2019.

“That comes against a backdrop of low population growth and increases in supply. There’s been particular softness in Wellington.”

Meanwhile, the cost of purchasing a newly built home was up 0.1% in the September quarter, and up just 0.8% over the past year.

“That’s the smallest annual increase since 2009. This softness reflects the stark downturn in home building over the past year and related softness in existing home prices.”

More generally, the September quarter brought muted price rises in a range of discretionary spending areas, including clothing and household durables, consistent with the continued softness in retail spending, Ranchhod said.

“For the RBNZ, prices in discretionary spending areas or areas that are responsive to interest rates remain low,” he said.

“There was little in today’s release that would prompt them to change their projection for a moderation in inflation over the year ahead.”

The new data showed price increases were becoming less extreme, said Kiwibank senior economist Mary Jo Vergara.

“Around 36% of the CPI basket recorded a decline in price, unchanged from the previous quarter,” she said.

“Meanwhile, the proportion of all measured goods and services that lifted in price fell from 54% to 51.8%.”

The September quarter would likely mark the peak in inflation, she said.

The current (December) quarter was also typically the weakest quarter for inflation.

“With that in mind, we expect inflation to fall back below 3% from here.

“And the risks further out are still tilted to the downside as the economic undercurrents are weak,” Vergara said.

“The move to 3% is unwanted. But it shouldn’t stand in the way of the RBNZ delivering further rate cuts.

“They should take comfort in underlying inflation, which remains subdued.”

Core measures of inflation, which strip out the volatile price movements, fell from 2.7% to 2.5% – still within the RBNZ’s target band and the lowest since March 2021.

“It is the RBNZ’s job to look through volatile movements in inflation, and set policy for late next year,” she said.

“And in 2026, inflation is set to slow below the mid-point of the target band [2%].”

Kiwibank continues to expect a move to 2.25% in the cash rate next month.

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.

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