Annual inflation is set to soften slightly in the March quarter but this is just a temporary reprieve, some economists say, with the March quarter only seeing the start of the oil crisis.
Statistics New Zealand will be releasing its Consumer Price Index (CPI) figures for the March quarter next Tuesday - the CPI is New Zealand's official measure of inflation.
At its February Monetary Policy Statement, the Reserve Bank (RBNZ) was confident inflation would fall back to 2%, projecting the March quarter would be 2.8%. But this was before the US and Israel attacked Iran.
Since then, there's been ongoing conflict in the Middle East which has impacted fuel supply and caused major supply disruption in the global oil market.
On April 8, the RBNZ’s Monetary Policy Committee left the Official Cash Rate (OCR) unchanged at 2.25% and also updated its projection for inflation - projecting 3.0% in the March quarter and 4.2% in the June quarter.
In the lead up to next week's CPI release, Statistics NZ released the Selected Price Indexes (SPI) on Friday. This is a monthly series that features about 47% of the contributors to the quarterly CPI. The stand out figures from the SPI showed petrol prices going up 18.6% and diesel prices jumping 42.6% from February to March.
Following this release, ANZ and ASB announced they're projecting 2.9% CPI for the March quarter, while Westpac has gone for 2.8%. BNZ is forecasting 3.0% while Kiwibank has made some adjustments to its forecast, projecting the annual rate will remain at 3.1% (as of the December quarter, the CPI was recording an annual rate of inflation of 3.1%).
'A temporary reprieve'
On Friday, Kiwibank economist Alexandra Turcu said the March quarter only got to see the start of the oil crisis, so she doesn’t expect Tuesday's numbers to show much price pressure.
“We’re expecting a chunky 0.9% over the first quarter, keeping the annual rate at 3.1%. That is significantly above our original forecast of 2.4% for the March quarter," Turcu said.
"Demand destruction is our biggest concern. The downside risk to global and domestic growth can't be understated here ... Until the conflict in the Middle East is resolved, we will continue to see the cost of oil and oil-derived products remain elevated. And this is severely impacting industries heavily reliant on diesel."
“The war in Iran broke out on the 28th of February, but the real impact didn’t hit our shores until mid-March, when we started to see petrol prices increase," Turcu said.
That means only a sixth of the first quarter was affected, which is two weeks out of 12.
“The June quarter is when the true impact will be felt.”
Westpac NZ senior economist Satish Ranchhod said while the annual inflation rate is set to soften a little in March, “this will be just a temporary reprieve”.
“Inflation is set to rise sharply through the middle part of the year in response to the recent rise in oil prices and related increase in other costs. We expect inflation will rise to around 4.3% mid-year.”
The March quarter will just be a "curtain raiser", he said. "The middle part of the year will see the full brunt of the recent rise in oil prices, as well as related increases in travel and other costs."
Return to RBNZ's target band 'looks to be off the cards until mid-2027'
ASB economists are expecting CPI to hit 2.9% and a 0.8% quarterly rise with senior economist Mark Smith saying: “The main drivers of the Q1 [first quarter] increase are higher prices for food, fuel, tobacco, and housing, with a few offsets.”
“After helping to dampen overall inflation in 2024 and early 2025, annual tradable inflation is now on its way to pushing above 3%. The Middle East conflict adds another layer of uncertainty to the New Zealand inflation profile, with a number of potential paths.”
“We expect headline inflation to spend most of 2026 around 4%. A return to the RBNZ’s target band looks to be off the cards until mid-2027,” Smith said.
BNZ head of research Stephen Toplis said rising fuel prices are already pushing headline inflation upwards but the second round impact of the oil crisis was never going to be apparent in the latest SPI data.
"Indeed, it may take many months to show up in some sectors. The initial movement in fuel prices, however, is there for all to see."
"Unfortunately, increases of a similar magnitude are likely to be reported in April," Toplis said.
"This is a key driver of our expectation that the June CPI will report a 2.0% increase in prices for the quarter alone."
He said there was nothing from the SPI data to change BNZ's inflation forecasts.
"We thus still believe the CPI rose 0.8% in the March quarter to be up 3.0% on year earlier levels. Also, we continue to believe headline inflation peaks at an annual 4.5% in Q2 [second quarter], 2026. We forecast headline inflation to remain outside the Reserve Bank’s target band until mid 2027 at the earliest."
'Watch and wait'
ANZ senior economist Miles Workman said the March quarter will “capture some initial impacts from the Middle East conflict”.
With ANZ's projection of 2.9%, Workman said; “given developments over the past couple of months, these data have a historical feel, with inflation set to accelerate sharply in Q2”.
“Barring a significant surprise to our forecast, it is reasonable to assume that uncertainty around the medium-term inflation outlook will be the Monetary Policy Committee’s main focus in May, rather than the Q1 starting point.”
“But that’s not to say the signal on underlying inflation in the Q1 data won’t matter: continued underlying disinflation would be a welcome sight given what’s coming, whereas a stronger inflationary vibe could see the RBNZ put less weight on the fact that the starting-point output gap is negative,” Workman said.
“The data will either add to or subtract from the Committee’s comfort with the plan to watch and wait until the picture is clearer.”
9 Comments
It's good fun the forecasting game, but most of the big influencers in the CPI basket are locked in... food is about 19% of the basket, and domestic prices follow global prices with a 9-12 month lag so expect a bit over 4% food price rise (food will therefore add about 0.9), local govt rate increases are just over 3% of the basket and increase for the first two quarter of 2026 are already set at 8% (so rates will add about 0.24). Petrol and diesel are worth 4% of the basket, so a full quarter 2 at these prices will add about 1.5 to Q2 annual CPI.
If you work through the weights, knowns and assumptions for quarter two you get to somewhere in the late fours for annual CPI (I have 4.8%). The wildcard components of the basket (eg international airfares) then decide whether your forecasts are about right or way off. If airfares take off (sorry) we will be into the 5s easily. If insurance starts to surge again, ditto.
Its worth standing back and looking at what is going on here though. Our moderate inflation through the early to mid 2010s was mainly a function of cheaper imports offsetting domestic price increases. In the late 2010s the game changed and the price of imported services grew significantly and then global goods prices shifted 20% in 2022/23. We are about to see a similar shock and we will be along for the ride. The ghouls can wail for more pain and (even) higher unemployment, and RBNZ can performatively increase interest rates etc to 'achieve' that, but it's all a sideshow. We pay import and export costs plus margin whether domestic demand is high or low.
What chance the weightings will be modified?
Next review is 2027.
RBNZ are the bluntest and dim-witted set of tools in NZs toolbox.
For them to not raise OCR rates, when inflation was already out of band and at 3.1%, was a critical error!
As I said then and now, they will be caught flat footed (AGAIN) and need to raise higher in the future, as they chase the wicked inflation snake, UP the ladder.
For the RBNZ to not reread their 5 year old, error ridden history, to again call recently that the inflation above 3% band as an "aberration (transitory) and will go away soon"
Fools,
IMHO Inflation will easily break 5%CPI during 2026 and this means mortgages over 7 to 8%
Brace and prepare NZ!
If the global price level shifts 10% over the next two years do you really think NZ can opt out of that somehow by hiking interest rates?
How as our discourse become so unsophisticated? CPI goes up, RBNZ must pull rates lever etc - it's the bluntest of tools and we have lots of better ones that get left in the toolbox.
Economist articles and projections are built on Hopium and a complete lack of historical analysis and understanding of the geo-politics.
Inflation with go to 5%+.
If we see an extended conflict, then a period of serious stagflation.
No need to cover the ineptitude of the Coalition and the Socialists in our total neglect of fuel security.
The biggest risk is diesel shortage and fertilizer shortage. The NZ economy is propped up by exporting 90% of the food it produces. Inputs materials for fertilizer come from overseas and are in short supply.
In the extended war scenario (6 months) GDP will reduce massively, plus the headwind of a weaker NZD/USD.
We are at pre-theatre drinks, the curtain has not risen yet!
Yes. Australia and NZ are being singled out internationally, as being the village idiots (bad preparedness, lack of awareness of our fundamental oil/fuel weakness) for not adhering to the IEA call, for all nations, to hold 90 days fuel on hand - at all times.
Lack of good governance it is. Head in sand.
Lack of fert supply will see less yields or perhaps even no plantings. Food prices are about to go nuts.
1. We must demand Govt enforce on all fuel suppliers, to hold larger stocks.
2. Drill baby drill needs Govt strong encouragement for oil/gas explorers.
I hope for a Maui2. A large natural gas discovery, could create a new/large fert supply chain locally.
The need for all nations to rebuild crude oil and refined fuel stocks will keep a strong bid on the various crude oil blends for the next 12 to 18 months, according to the oil industry analysts. So sustained inflation is the future and the cost of debt funds ballooning. Like it or lump it ......its an incoming economic missile, that no interceptor can touch.
Sorry NZ, all we have is hopes and dreams currently - and pineapple lumps.....
More worryingly NZs addiction and high intoxication levels of bad debt (unsupported by good income) will see many skinny lambs to the abattoir.
- In the meantime NZ, brace for a bumpy landing, on rocky terrain! Can the landing gear handle it ? maybe.
Crikey, we’ve gone from CPI data to Mad Max in record time
Great and heartening to see you learning a lot here, Wellywood's.
Honest question: Are you one of the increasingly concerning number of NZers, who has raided Kiwisaver over the last 5 years?
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