Headline inflation held steady at 2.2% in the December quarter, and various measures of core inflation continued to ease, even as the Reserve Bank of New Zealand (RBNZ) began to cut interest rates.
Statistics NZ said the Consumer Price Index (CPI) rose 0.5% in the final three months of 2024, keeping the annual inflation rate at 2.2%, a result broadly in line with forecasts from both the RBNZ and economists.
This result affirms the central bank’s decision to loosen monetary policy in August last year, shortly before headline inflation fell into the 1% to 3% target range during that quarter.
On target annual inflation has been possible largely due to lower import prices, a trend that persisted in the December quarter. Tradable inflation remained negative at -1.1%, while non-tradable inflation declined from 4.9% to 4.5% — below market expectations for 4.7%.
Core inflation also eased from slightly elevated levels. The trimmed mean, which excludes the most significant price changes, fell from about 2.5% to 2.3%, while the CPI excluding food and energy declined from 3.1% to 3%.
Nicola Growden, a Stats NZ spokesperson, said this was the second consecutive quarter the annual inflation rate had been in the RBNZ’s target range.
“Prices are still rising, but not as much as previously recorded. The most recent peak was in the June 2022 quarter when annual inflation reached 7.3%,” she said in a release.
Rent was the largest contributor to the annual inflation rate. Prices rose 4.2% across 2024 and were responsible for almost a fifth of the overall rate. Local authority rates were another big contributor, with a 12.2% increase making up 16% of annual inflation.
Petrol and fruit and vegetable prices fell 9.2% and 8.6% during the year, helping to offset other increases. Together these two categories make up 6.5% of the CPI basket.
Domestic and international airfares, which rose 9.3% and 6.6% each, along with holiday accommodation, which increased by 3.4%, were some of the largest contributors to December's quarterly inflation rate. These items, which are generally more expensive during the summer months, account for about 6% of the CPI.
Insurance premiums, which make up 3% of the index, rose 1.8% over the past three months. Recent cyclones and floods have driven up reinsurance costs, while inflation has increased the cost of replacing insured items. As a result, insurance premiums have risen 11.2% in the year.
Satish Ranchhod, an economist at Westpac NZ, said much of the pressure on the domestic inflation rate stemmed from non-interest rate sensitive sectors such as insurance and local council rates, which increased 12% this year.
“But even with the ‘stickiness’ in costs like insurance premiums, the overall trend in inflation is now looking much more benign than it has for a long time,” he wrote in a note prior to the data release.
“The underlying trend in inflation is much better contained than it has been in a long time, with measures of core inflation drifting back towards the 2% midpoint of the RBNZ’s target band.”
Helping to reduce inflation in the December quarter was a 0.5% decline in food prices, which make up 18.8% of CPI, and a 1.3% fall in petrol prices — another 4% of the index.
However, economists warn that deflation in tradable prices is likely to reverse in 2025 as the global economy grows, the Kiwi dollar weakens, and oil prices increase. Petrol pump prices were low for most of the December quarter but rose sharply heading into January.
Economists at BNZ are forecasting the annual inflation rate will increase to 2.5% throughout much of 2025, as tradable inflation returns before non-tradable inflation falls to the desired 3%. However, this shouldn’t deter the RBNZ from cutting interest rates to neutral.
“Overall, the balance of indicators suggests underlying economic activity struggled to gain traction in Q4 and points to the output gap continuing to widen. This is expected to maintain downward pressure on large parts of domestic inflation over the medium term,” they wrote in a note.
New Zealand’s annual inflation rate is now lower than other comparable countries. Australia’s monthly rate in November was 2.3%, the United Kingdom’s equivalent CPI measure was 2.5% in December, and the United States’ was at 2.9%.
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