Although the latest CPI inflation data wasn't as worrying as it could have been, economists still see more OCR increases ahead

Despite annual inflation hitting its highest level for two and a half years, bank economists say the latest Consumers Price Index (CPI) data release isn’t as worrying as it could have been.

Annual inflation, as measured by Statistics New Zealand’s CPI, increased to 4.1% in the June quarter, largely driven by higher petrol prices, up 27.5%.

The latest CPI figure was in line with bank economists’ forecasts but above the Reserve Bank’s (RBNZ) projection of 3.9%. It was well above the RBNZ’s inflation target band, which is 1% to 3%.

Following the CPI release, Kiwibank economists Alexandra Turcu and Elliott Lowe said: “The headline number is high. In fact, it is the highest since [4.7% in] December 2023. But we aren't surprised. And we don't expect the RBNZ to be surprised either.”

“Whether it's filling up the car, or the wince before turning on the heater at night, Kiwi households and businesses are feeling the pain. And today’s data simply validates that.”

'What's happening to other prices in the economy?'

Turcu and Lowe also pointed out that headline inflation would have been 2.9% in the June quarter, had petrol and diesel prices not changed.

“From our perspective, core measures of inflation are what matter. The numbers look less scary when volatile energy (especially fuel) prices are stripped out. This release should allow the RBNZ to breathe easy, even though their forecast of 3.9% was off by 0.2 percentage points.”

Westpac NZ senior economist Satish Ranchhod said: “While fuel prices did push inflation sharply higher over the past few months, a key focus for the RBNZ is what’s been happening to other prices in the economy. In particular, are we seeing signs of a broader pick-up in inflation pressures?”

He said at this stage, underlying inflation pressures were still looking relatively contained and that was reflected in core inflation which generally eased slightly over the past few months.

“Overall, today’s result wasn’t as worrying as it could have been, with limited signs of widespread spillover from high oil prices. But inflation is still high.”

June quarter never going to reveal 'full impact of the oil shock on medium-term inflation'

ANZ senior economist Miles Workman said while they were hopeful that the June quarter will mark the peak in annual inflation following the oil price shock, oil prices are currently rising again.

“And in any case the RBNZ is unlikely to stop worrying about potential spillover effects any time soon.”

“Gradual progress on non-tradable inflation and broadly contained core inflation is unlikely to move the Monetary Policy Committee’s policy assessment significantly. Their major concern is balancing risks to the outlook, and in that context this starting point for underlying inflation momentum is not a red flag," Workman said.

But he said Tuesday’s data was never going to reveal the full impact of the oil shock on medium-term inflation.

“And for the RBNZ, that is what ultimately matters.”

“Indeed, the Monetary Policy Committee will be most concerned about the effect of the fuel shock on inflation expectations and firms’ pricing behaviour (i.e. the extent to which firms pass on higher costs, and whether they reverse those increases when costs fall)," said Workman.

“Adding to these risks, administrative price inflation (e.g. council rates, which are set to feature prominently in Q3) is likely to remain elevated for an extended period.”

Workman said these considerations had to be weighed against the fact that “the economy still appears to have ample disinflationary spare capacity”.

“All in all, today’s data suggest that the RBNZ’s strategy of withdrawing monetary stimulus and facing into inflation risks with monetary conditions in a more neutral position is sensible.”

Official Cash Rate

He said the latest CPI data is consistent with the bank’s Official Cash Rate (OCR) call for a 25 basis point hike in September and October.

In July, the RBNZ raised the OCR to 2.50% from 2.25%.

Westpac’s Ranchhod said they continued to expect that the RBNZ would deliver further OCR increases through the back of the year.

“However, the pace of those increases remains dependent on the strength of economic conditions more generally. We think that hikes are most likely at the RBNZ’s September and December policy meetings," he said.

“While oil prices have pulled back from their initial highs, ongoing geopolitical tensions could keep them elevated for some time. Consistent with those developments, we expect that headline inflation will linger above 3% through the latter part of the year.”

Kiwibank’s Turcu and Lowe said the real cost of the oil crisis on inflation will come out in the third and fourth quarter data.

“We know that will likely mean the RBNZ will continue on its path to hiking the official cash rate to a neutral rate. With two more rate hikes likely this year, we see that interest rate rising to 3% by the end of 2026.”

The RBNZ’s next OCR reviews are set for September 2, October 28 (this is a week before election and during the early voting period), and December 9.

‘Donald Trump has certainly made things hard’

Speaking to reporters on Tuesday, Finance Minister Nicola Willis said she acknowledged the latest CPI figure was higher than anyone would want to see.

“Donald Trump has certainly made things hard and I think any economist would fully acknowledge that the cause of this high inflation in the quarter just released is the international fuel shock.”

Asked if she thought New Zealanders would believe this is all US President Donald Trump’s fault, Willis said: “I think any New Zealander who has purchased petrol in the past few months knows what has happened.”

“It has gone up massively in price and that has contributed to pressure on everyone’s household budget, and they need only look at international oil prices and the events in the Middle East to know the cause of that.”

Labour finance spokesperson Barbara Edmonds said: “When fuel prices surged during the war in Ukraine, National demanded accountability from Labour. Now they're in government, they're asking New Zealanders to accept exactly the same pressures they once condemned.”

“This isn’t about politics, it's about whether families can afford the basics.”

Edmonds told reporters: “I’m holding Nicola Willis to the same standard she held Grant Robertson to, which is you can’t just blame everything on overseas factors.”