While annual inflation may have slowed in the September quarter, underlying inflation is raising concerns for economists ahead of the Reserve Bank's Official Cash Rate (OCR) review next week.
Many economists have pencilled in a 25 basis points OCR hike to 3% for next Wednesday's meeting, with financial market pricing having a 25 basis point OCR hike almost fully priced in for October 28.
Back in September, the Reserve Bank (RBNZ) hinted at a possible pause at the next OCR review following an increase in September to 2.75% from 2.50%.
But things have changed since the RBNZ's September Monetary Policy Statement (MPS), with ongoing conflict in the Middle East leading to rising oil prices, a weak New Zealand dollar and recent economic data such as the latest gross domestic product (GDP) figures and Statistics NZ’s latest Selected Price Indexes (SPI) figures, seeing some economists picking an OCR increase on October 28.
And Statistics NZ's release of the latest Consumers Price Index (CPI) figures on Thursday added to this. Annual inflation, as measured by the Consumers Price Index (CPI), was 3.7% in the September quarter, largely driven by petrol prices, up 19.1%. While the latest annual CPI figure was below 4.1% in the June quarter, a touch below many bank economists’ forecasts and below the RBNZ’s projection of 3.9%, the 3.7% figure continues to breach the RBNZ's target range of 1% to 3%, and has been touted as a "temporary reprieve."
'We would characterise the signal in the core measures as a little worrying'
Several underlying measures were showing a broadening of inflationary pressures at “uncomfortable levels”, Brad Olsen, principal economist at economic consultancy Infometrics, said.
In the 12 months to the September quarter, 85.5% of the CPI basket increased in price. Over the same period, 54.9% of the CPI basket increased by more than 3%, up from 38.5% in the June quarter. In contrast, about 13% of the CPI basket fell in price - the lowest proportion since the December 2023 quarter, according to Statistics NZ.
“There are also some figures in the September inflation report providing a sense that prior inflationary drivers, like electricity and administered costs, are past their peak, but there are different drivers emerging," Olsen said.
“We see inflationary pressures falling broadly into three groups. First is fuel, with obvious higher prices coming through. Second are conflict-related price increases, for air travel, building costs and plastics, and similar items. Third are other prices that are less directly influenced by the first two pricing trends.”
The RBNZ is in a difficult position with fuel and conflict-related price increases leading inflationary pressures higher and broadening out, he said.
“But they are also areas where the [Reserve] Bank’s ability to restrain further price increases with a higher OCR is limited. As a result, the OCR potentially needs to be higher to restrain pricing pressures in the third group, effectively needing to hit pricing intentions even harder for some products to make up for those prices that the Bank has less influence over.”
ANZ senior economist Miles Workman pointed out that services inflation accelerated 0.5 percentage points to 3.1% year-on-year, while CPI excluding the food group, fuel and household energy, rose 0.4 percentage points to 2.9%.
Despite headline and non-tradeable inflation coming in below the RBNZ's forecast, Workman said: “We would characterise the signal in the core measures as a little worrying, meaning these data are perhaps more hawkish than initially meets the eye.”
Fuel price shock broadening?
Workman said the signal on underlying inflation pressure suggested the fuel price shock could be broadening across the CPI basket.
“While that might prove to be more noise than signal, it is something the Monetary Policy Committee will be concerned about,” he said.
“And with the NZ dollar stubbornly low and global oil prices stubbornly high, we think the RBNZ will certainly be revising up its near-term inflation forecast at the upcoming Monetary Policy Review, providing clear justification for another 25 basis point hike.”
“We remain comfortable with our expectation that the RBNZ will withdraw a further 25 basis points of monetary stimulus at its Monetary Policy Review next week," Workman said.
“We expect the Committee will maintain a tightening bias and watch the data closely through the summer … Oil shocks are tricky, meaning policymakers need to remain nimble.”
Westpac NZ senior economist Satish Ranchhod said the firmness in core inflation will give the central bank pause for thought ahead of their OCR review next week.
Market pricing and views have “coalesced around an October hike”, Ranchhod said, and Westpac economists now suspect “the RBNZ will regard this as the path of least resistance, and we now expect that they will deliver."
BNZ senior economist Doug Steel said: "Third quarter CPI inflation was a tick lower than the RBNZ’s projection for the quarter and two ticks lower for the year. We do not think this will materially alter the Bank’s thinking for next week’s OCR decision, where we continue to expect a 25 basis point hike."
"The Bank, like all of us, can see the upward pressure on inflation still to come through from higher fuel prices and a lower NZ dollar. All along we thought the precise third quarter outcome was of secondary importance to what is shaping up in the fourth quarter, which, looks to be a long way north of the 3.9% that the RBNZ projected in its September MPS."
"The market looks to have drawn a similar conclusion judging by the reaction to today’s data," Steel said.
But Kiwibank economists Alexandra Turcu and Elliott Lowe don’t think another rate hike is needed yet. But if one is coming, they suggest getting it done sooner rather than later.
“We say get it over and done with if they’re going to do it. Take the interest rate to 3% and hold it there so we can have some stability," Turcu and Lowe say. The OCR is currently at 2.75%.
“We don’t think a hike is needed at all, to be clear. But if the fear is that domestic prices will rise as a result of the oil shock (which they haven’t), then rip the band-aid off and let us get on with trying to recover as an economy.”
Annual inflation for December quarter ‘shaping up to be bad,' ASB picks 4.7%
Turcu and Lowe said December quarter CPI inflation was “shaping up to be bad.”
“With record high shipping costs for oil into Asia, we will continue to feel the pinch at the pump here in Aotearoa. The question remains of whether domestic businesses will start to raise prices as a result. If the last two quarters tells us anything about that, it’s that they can’t even if they want to,” they said.
“Consumers are spending more on petrol and have less to spend on everything else.”
ASB senior economist Mark Smith said annual CPI inflation is likely to remain well above 3% for most of 2027.
“Sharp fourth quarter increases for fuel prices, airfares and rising construction costs are expected to push annual CPI inflation well above 4% by the end of the year … Despite the softer-than-expected headline print, the details point to firming underlying price pressures. We have subsequently revised up our pick for annual fourth quarter CPI inflation to 4.7%," Smith said.
“Worryingly, we are likely to see annual rates for tradable and non-tradable inflation remain well above 3% and likely be on a firming trajectory.”
‘We can’t control everything in the Middle East, but we can control our own government spending’
National finance spokesperson Nicola Willis said while the latest annual CPI figure was “encouraging,” she always wanted to see inflation lower as this affected the price of everything people paid for.
Speaking to reporters, Willis said: “We can't control everything in the Middle East, but we can control our own government spending. And by keeping that disciplined, we keep the fuel off the fire.”
“While we’ve seen a drop in inflation this quarter, which is positive, we’re also all living right now the reality that petrol prices have gone up since then. There's no getting away from it. That will be reflected in the next set of data.”
She said National had been “fixing the underlying foundations and New Zealand will be seeing the rewards if we stick to the plan.”
Cost of living still rising
But Labour finance and economy spokesperson Barbara Edmonds said the latest inflation figures showed the cost of living was still going up and families were paying the price for “National’s broken promises.”
“Inflation is 3.7%, outside the Reserve Bank’s target band, and economists are warning prices could climb even further before Christmas,” Edmonds said.
“Every week it just keeps getting worse. Today’s high inflation could mean another interest rate hike next week, piling even more pressure on homeowners already struggling with their mortgages.”
“People are working hard, doing everything right and still falling behind – that's not good enough. Instead of making life easier, National has cut the services people rely on while the bills keep piling up,” Edmonds said.
The RBNZ’s next OCR review is on October 28.
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