Inflation preview: Annual price rises expected to be below 3% for first time since 2021

While the price of imported goods has fallen, domestic inflation remains too high, economists say. Photo / 123rf

As it cut the Official Cash Rate last week, the Reserve Bank of New Zealand (RBNZ) said it was confident inflation was now below 3%, but on Wednesday we’ll get the official Consumers Price Index (CPI) figure from Stats NZ.

Most economists expect a substantial drop from the 3.3% annual rate recorded in the second quarter.

ANZ economists are tipping a quarterly rate of 0.8% for a 2.3% annual rate. Westpac and ASB see a 0.7% rate for an annual rate of just 2.2%.

The expected result would represent the first time the annual inflation rate had dropped below 3% since 2021, Westpac senior economist Satish Ranchhod said.

“Our forecast is slightly below the RBNZ’s forecast from their August Monetary Policy Statement reflecting weaker fuel prices in recent months as the oil price has fallen,” Ranchhod said.

But he warned there were risks on both sides for inflation.

“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 also 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.”

ANZ economists expect non-tradable (domestically driven) inflation to come in at 1.5% for the quarter and 5.2% annually. That would only be a slight fall from the 5.4% annual rate recorded in the second quarter.

The RBNZ has a forecast of 1.4% for the quarter.

Local council rates were expected to be a key driver of quarterly inflation, posting their largest quarterly rise since 1987, Workman said.

“We expect tradeable (largely imported) inflation to come in at -0.2% q/q (-1.6% y/y), in line with the RBNZ’s forecast. Lower petrol prices are expected to be the weak spot (aided by the removal of Auckland’s regional fuel tax).”

The underlying trend in consumer price growth, or core measure, was going to be more important than the headline print, said Kiwibank senior economist Mary Jo Vergara.

“Core measures of inflation strip out the items within the CPI basket vulnerable to volatile price movements – food, energy, utilities,” she said.

Core inflation has been trending lower since hitting the 6.7% peak in December 2022 and currently sits at 3.4%.

There was a chance we could see it fall back within the target band as well, she said.

Kiwibank economist Mary Jo Vergara: "A lot of the inflation we're seeing now, specifically the domestic side, stems from the housing market." Photo / Fiona Goodall

“Next week’s update should be further confirmation that inflation continues to move in the right direction. And faster than we initially anticipated,” she said.

“Forward-looking activity and pricing indicators point to further moderation in price growth. We may not have to wait until next year to see the RBNZ’s 2% inflation target achieved.

Vergara also noted imported deflation – led by falling petrol prices – continued to drag down overall inflation.

“Domestic inflation, however, is a slow-moving beast. Services inflation is still running hot. But slowing wage growth limits further moves to the upside.”

ASB senior economist Mark Smith said there was a risk of inflation falling fast from here and warned sub-2% annual CPI inflation was possible within the next 12 months.

“Softening signs on the pricing side of the economy and increasing spare capacity highlight the risk of inflation settling well below 2% in the absence of further cuts to the OCR [Official Cash Rate],” he said.

“The largest regret is that the RBNZ proves to be too slow in monetary policy easing. We expect a 50 [basis point] cut in November (4.25%), and a 3.25% OCR endpoint. However, the timing and magnitude of OCR cuts hinges on how quickly the RBNZ would like to normalise settings.”

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.