The annual rate of inflation dropped to 6% in the June quarter as high interest rates begin to bite into household budgets.
Statistics NZ’s consumer price index increased just 1.1% between March and June, the smallest rise since the first quarter of 2021.
The annual rate of inflation has dropped from 6.7% as of March, and 7.2% as of December 2022. It peaked at 7.3% in June 2022.
“Prices are still increasing at rates not seen since the 1990s but are rising at a lower rate than the last few quarters,” consumer prices manager Nicola Growden said.
This was what the Reserve Bank of New Zealand had forecast and was baked into last week’s decision to hold the Official Cash Rate (OCR) at 5.50% after a dozen consecutive hikes.
Economists and commentators have said this data release would test whether that decision was the right one and whether rates were high enough to ‘do the trick’.
Lower petrol prices helped to drive headline inflation lower. Global oil prices spiked last year after Russia invaded Ukraine but they have since fallen due to weak demand.
Petrol prices at the pump have fallen around 15% over the past year, but those savings have been offset by much higher food prices that have increased more than 12%.
Disastrous weather in the North Island has been pushing up the price of fresh produce, up 21% from a year ago, but the cost of groceries and restaurant meals have also increased.
This was the largest annual increase since 1987 when goods and services tax was first introduced.
“With food prices up 12.3% annually, consumers may be buying cheaper alternatives to keep their food bill lower,” Growden said.
Stats NZ tracks a fixed basket of goods and consumers personal rate of inflation might be higher or lower than the average they report.
The cost of food is extremely important to consumers, but it only makes up less than a fifth of the consumers price index.
Housing is the largest category in the index and was the second biggest contributor to headline inflation. Rents were up 4.2% and construction costs were up 7.8% on an annual basis.
The price of building a new home has increased by more than a third over the past three years, despite house prices having fallen almost 16% from their peak.
Recreation and culture were the next largest contributor, driven by rising prices of pets products and overseas accommodation.
While offshore hotel rooms were getting more expensive, flying there was getting cheaper. International airfares fell 11.9% and are beginning to trend back toward pre-Covid prices.
A chunk of the decline in headline inflation was due to Ukraine-related price shocks dropping out of the annual calculation, such as petrol prices which had their largest annual fall since September 2009.
While the central bank will be pleased to see headline inflation retreat, domestic price increases have proved to be more stubborn.
Non-tradable inflation drops, but not much
Annual non-tradable inflation was still running at a record of 6.8% in the March quarter, despite headline inflation having peaked at 7.3% nine months earlier.
It finally fell in the June quarter—to an annual 6.6%—suggesting domestic inflation has also peaked. The biggest pressures in non-tradable inflation was construction, rent, and ready-to-eat food.
Stats NZ said non-tradable inflation measures goods and services that do not face foreign competition and is an indicator of demand and supply in the domestic economy.
The RBNZ said in its monetary policy review last week that it expected core inflation to decline as capacity constraints eased, although it didn’t comment on when that might happen.
Inflation has been falling globally. The United States’ annual rate dropped to 3% in May, which is the slowest rate since the start of 2021 and core inflation fell to 4.8%.
Australia’s annual rate fell to 5.6% in May, having peaked above 8% late last year. European inflation was at 7.1% in the June quarter and the OECD average was 6.5%.
New Zealand’s economy is most comparable to Australia, as European countries have been more exposed to energy price shocks and the United States is the largest economy on Earth.
Overall, the June data should support the Reserve Bank’s view that holding the OCR at its current level will be enough to bring headline and underlying inflation under control.
That said, next quarter will contain some extra inflation pressure as Government fuel tax cuts and public transport subsidies ended on July 1. Council rate increases will also be high.
More costs and fallouts from the cyclone and flooding are also working their way through the economy and could show up next quarter.
Prior to the data release, financial markets and some economists were still predicting the Reserve Bank would increase the OCR another 25 basis points before the end of the year.
'A hot core of inflation'
Brad Olsen, chief executive of Infometrics, said the result was what the Reserve Bank had expected but it may be concerned about sticky domestic inflation.
Household essentials were were still “intensely hot”, with food, energy and rents all putting pressure on people’s budgets.
“There is still a hot core of inflation. The question now will be where the new normal will land, because if it is above 4% then there will be more work to do,” he said.
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