ASB senior economist Mark Smith says the latest Selected Price Indexes give some comfort inflation is moderating from its 4.1% peak

Even though Monday's Selected Price Indexes suggest inflation is cooling somewhat, economists continue to expect the Reserve Bank (RBNZ) to increase the Official Cash Rate (OCR) again.

“We continue to believe the RBNZ will further remove monetary stimulus [by increasing the OCR] at its next Monetary Policy Statement on 2 September," BNZ senior economist Doug Steel says.

“Our view remains that the OCR, currently 2.50%, will continue to move higher as the RBNZ seeks to normalise OCR settings in a timely fashion. A 3.25% by year end beckons," ASB senior economist Mark Smith says.

Statistics NZ's latest Selected Price Indexes (SPI) figures saw a monthly drop in fuel prices during July, but a surge in domestic and international airfares.

While petrol prices were down 5.7% and diesel dropped 12.1% from June to July, the latest SPI showed monthly domestic airfares rising 20.7% and international fares increasing 10.9%.

With the SPI featuring about 47% of the contributors to the quarterly Consumers Price Index (CPI), it provides a good steer of how inflation is tracking.  As of the June quarter, the CPI was at 4.1% - the highest annual inflation rate NZ has seen since it hit 4.7% in December 2023.

Meanwhile, the OCR is sitting at 2.50%, after a 25 basis points increase on July 8, with the RBNZ projecting annual headline inflation will drop to 3.3% in the September quarter. For the June quarter, the RBNZ was projecting inflation to peak at 3.9%.

The OCR will next be reviewed on September 2 and the September quarter CPI is due out on October 22.

Smith says annual inflation, as measured by the CPI, “looks to be cooling from its 4.1% second quarter peak."

“There are two-sided risks. A more contained external inflation environment, moderating NZ pricing metrics, and abundant spare capacity could increase the RBNZ’s confidence that medium-term inflation will settle around the inflation target midpoint," says Smith.

He says this could see the OCR peak below 3.25%.

“Conversely, if pricing side metrics point to a generalised and persistent uplift in inflation emerging, a higher OCR could result in 2027.”

In its July monetary policy review the RBNZ noted although oil prices had fallen, the effects of the oil shock would linger for some time.

“With inflation still above target and economic activity expected to strengthen, some further reduction in monetary stimulus is likely to be required to return inflation to the 2% target midpoint,” the RBNZ said.

Paths ahead

Smith said there were a number of paths ahead for inflation over 2026.

“However, following today’s figures we are more comfortable with our expectation that annual CPI inflation is moderating from its 4.1% second quarter peak," he said.

“After peaking at 4.1% in the June 2026 year, our central forecasts have annual CPI inflation moving towards 3.5% by Q4 (fourth quarter). We don’t expect CPI inflation to fall below 3% until mid-2027, with annual CPI inflation set to settle in the low 2’s from the second half of 2027."

“Much of the moderation is driven by cooling tradable inflation and the assumption that the large margin of spare capacity within the NZ economy adjudged to cap the flow through into broader price setting from the current inflation spike," Smith said.

“This is our best guess at present, and predicting tradable CPI inflation is difficult given rapidly changing global developments. We are keeping close tabs on global developments as well as local developments, including surveyed pricing intentions and inflation expectations.”

Some downside risk to economists’ inflation projections

Westpac senior economist Satish Ranchhod said price pressures were softer than expected in July.

"Looking into the details, July saw a large 1.4% fall in meat prices. That was the largest monthly fall since 2020 ...This augurs well for a weekend barbecue."

He also noted softer than expected alcohol prices, flat household energy prices and a fall in housing rents. 

When it came to domestic and international airfare increases, Ranchhod said both of these categories experience large seasonal swings, and are likely to ease back next month.

“However, with global fuel prices still elevated, this is one area where we could see ongoing strength.”

Putting it all together, Ranchhod said the latest SPI figures signal some downside risk to Westpac’s forecast of 3.7% for the CPI in the September quarter.

“However, we’re still left with a picture of inflation that’s likely to be well above the RBNZ target range for the remainder of this year, including firm levels of core inflation.”

ANZ senior economist Miles Workman said the latest SPI came in weaker than ANZ’s expectation, which suggested some downside risk to its 3.9% projection of CPI for the September quarter.

“However, given this is only the first month of the quarter, we maintain our forecast for now, but acknowledge the risk signalled by today’s release.

“While some of the surprise today came from the more volatile components, some of the more slow-moving and persistent indexes surprised to the downside too (rents for instance).”

BNZ senior economist Doug Steel said the latest SPI figures confirmed sharp drops in petrol and diesel prices in the month, as BNZ economists expected. But fuel prices remain much higher than a year ago, he said.

“Similar for electricity and gas, flattening off as we thought but still up 9.5% and 10.9% on a year ago respectively. Rent inflation remained predictably weak, close to zero for the month and year.”

Steel said food prices were a touch softer than pencilled in and the downside surprise was offset by much higher airfares showing up in the data.

“The lack of airfare increases to date had been a little puzzling, but they lifted strongly in July,” he said.

“Through the noise, the balance of monthly price changes was broadly in line with our expectations.”

Steel said at first glance, there seems to be no reason to change BNZ’s inflation projection of 3.7% for the September quarter.

“This supports our view that annual CPI inflation peaked in Q2, but it is still shaping up to be above the annual 3.3% forecast by the RBNZ when it released its July 8 Monetary Policy Review.”