Many bank economists are projecting inflation, as measured by the Consumers Price Index (CPI), will be a smidge below the Reserve Bank’s June quarter projection of 4.2%.
On Tuesday, Statistics NZ's latest Selected Price Indexes (SPI) figures showed petrol and diesel prices dropped slightly in May, following two months of rises. Alongside this, monthly food prices were up 1.0%.
Following the SPI release, ANZ, Westpac and ASB downgraded their inflation projection for the June quarter - all settling on 4.1%. ANZ and Westpac had previously projected 4.4% while ASB had picked 4.3%.
BNZ revised its projection up slightly, going from 4.0% to forecasting 4.1% for the June quarter. BNZ senior economist Doug Steel did caveat this revision, saying the June quarter figure was still dependent on the June monthly results and the rest of the CPI that is not covered by the monthly indicators.
The SPI is a monthly series that features about 47% of the contributors to the CPI. The Reserve Bank (RBNZ) is tasked with keeping inflation between 1% and 3%.
Volatility assured
Steel said volatility seems assured in the monthly SPI.
“There was a bit more of it in today’s figures for May. After being surprised on the downside last month, the balance of May price movements was a touch stronger than we had pencilled in.”
Steel said most of the surprise came from food prices. “There were solid monthly gains in vegetables, groceries, and restaurant meals and ready-to-eat food.”
ANZ senior economist Miles Workman said looking forward, the shock to global fertiliser supply due to the Middle East conflict along with higher freight costs will likely add to global food price inflation.
ASB senior economist Mark Smith said consumer caution and the subdued backdrop was still having a moderating impact on inflation.
“Downward surprises were evident for a number of spending categories including accommodation and airfares. Rents dipped in May and annual dwelling rental inflation looks to have hit a record low.”
US-Iran deal
Steel said fuel prices fell as anticipated and the drop took the “edge off very high annual inflation in these components after strong gains in previous months”.
“Our forecasts include further material fuel price declines. The latest deal between the US and Iran to stop hostilities and reopen the Strait of Hormuz supports the case for further declines in fuel prices at the pump," Steel said.
“But we, along with everyone else, will continue to monitor developments and alter our projections if needs be.”
Westpac senior economist Satish Ranchhod said: “Recent weeks have also seen fuel prices starting to drop back with petrol prices down 4% and diesel prices down 11% in May.”
“Importantly, with an easing in tensions in the Middle East we expect to see a further fall in pump prices over the coming weeks.”
ANZ’s Workman said: “While a lower-than-otherwise near-term surge in inflation, alongside recent headlines that the US and Iran have agreed to a Memorandum of Understanding is certainly welcome, this doesn’t fully unwind the global supply shock, and it is still early days as far as the medium-term inflation outlook is concerned.”
ASB’s Smith said if the deal holds, the softer outlook for oil prices is likely to significantly lower the profile for inflation over 2026.
“Our central forecasts now have annual CPI inflation hitting 4.1% in the June 2026 year and ending 2026 at around 3.6%. This is below the May MPS (Monetary Policy Statement) forecasts.
“The inflation outlook for 2027 is highly uncertain, with a tug-o-war currently at play between cost and demand driven influences.”
As of the March quarter, annual inflation came in at 3.1%, slightly above the RBNZ’s projections of 3%.
“The Iran conflict has added considerable volatility to the path of inflation in NZ and many countries. The recently announced US-Iran deal provides cause for optimism, although there are a number of obstacles that could stymie the deal. It will take time for energy markets and freight disruptions to recover and there are no quick fixes,” Smith said.
“We do not expect further large falls for oil prices, which are expected to settle close to US$80 per barrel.”
“The outlook is incredibly uncertain and there are a number of paths ahead for inflation over 2026,” Smith said.
The June quarter CPI is due out on July 21.
Official Cash Rate, increase coming?
At its May Monetary Policy Statement, the RBNZ held the OCR at 2.25% and signalled the holding period was coming to an end and OCR hikes were on the horizon.
Smith has long said increases are a matter of when and not if. ASB has pencilled in July as a start to OCR hikes in 25 basis point increments, and having the OCR end 2026 at 3.25%. The next OCR review is July 8.
“This is not a high conviction call, with risks tilted to a later start to OCR hikes and a more drawn-out hiking cycle,” he said.
“Soft underlying details and hopes of a retracement in freight and energy costs may encourage the RBNZ to wait for more conclusive signs on the medium-term inflation outlook before pulling the OCR trigger.”
ANZ’s Workman said: “For the RBNZ, it is the medium-term inflation outlook that matters, and that will be a function of both the degree of demand destruction and inflation inertia (for example, via inflation expectations) stemming from this shock.”
“The RBNZ’s top priority is to ensure that the current surge in inflation does not broaden into core inflation over the medium term, and that suggests it remains appropriate to start withdrawing monetary stimulus from July. We continue to expect a 25 basis point hike next month.”
Westpac is projecting a rate hike from September and Ranchhod said markets were currently pricing a high likelihood (around 75%) of a July start to the RBNZ’s hiking cycle.
“While we can’t rule that out, we continue to expect the RBNZ will remain on hold until the September MPS meeting," he said.
“The more gradual than expected rise in prices, along with the easing in global tensions, means that the RBNZ has more time up its sleeve to see how the economy and inflation is evolving in response to the Iran war.
"Reinforcing the case for a continued pause in July, recent business surveys (like the PMIs) have pointed to a cooling in activity. There’s also been softness in the labour market, with limited upward pressure on wages despite the rise in living costs."
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