Inflation increased more than expected by the Reserve Bank (RBNZ) and most bank economists in the September quarter off the back of higher local authority rates, rents, insurance costs and cigarettes.
The Consumer Price Index (CPI) rose to 0.7% from 0.6% the previous quarter. Year-on-year it fell to 1.5% from 1.7%.
The RBNZ, in its August Monetary Policy Statement, forecast quarterly inflation of 0.5% and annual inflation of 1.3%.
So while the September figures undershot the 2% midpoint of the RBNZ’s annual inflation target, they painted a rosier a picture of the economy than expected.
However, it is unlikely the RBNZ will be swayed from cutting the Official Cash Rate (OCR) on November 13.
CPI is a lagging indicator, and the global outlook remains grim, business confidence is weak and the RBNZ is mindful of keeping abreast with other central banks loosening monetary policy to prevent the NZ dollar from becoming over-valued.
The stronger-than-expected data might however reduce the risk of the RBNZ cutting the OCR by 50 basis points in one go (as it did in August) as opposed to making the usual and more widely expected 25-point change.
The NZ dollar rose to 63.1 US cents, from 62.8 US cents, on the release of the figures, but fell back soon after.
Taking a closer look at the data, property rates and related services were up 5% compared to the September 2018 quarter.
Rents were up 2.9% and new home construction costs were up 2.8%.
Insurance costs also rose 4.8% year-on-year.
Meanwhile cigarette and tobacco prices were up 7.7%.
The cost of domestic flights stood out - rising a whopping 15.7% from the previous quarter. Road passenger transport costs were also up 2.0%.
This was despite lower petrol prices - down 0.8% in the quarter and 2.9% year-on-year.
Fruit and vegetables prices were also 5.2% lower. Meanwhile meat, poultry and fish prices were 6.4% higher.
Tradeable inflation was only up 0.7% in the year, meanwhile non-tradeable inflation was up 3.2% - an 8-year high.
Low global inflation and competitive pressures continue to hold down prices for imported goods.
Statistics NZ’s trimmed mean CPI measure, which excludes extreme price movements, ranged from 1.7% to 1.8% for the year. So underlying inflation was higher than the 1.5% overall increase in the CPI.
ASB senior economist Mark Smith said: "Despite the firmer starting point for headline and non-tradable inflation, the fact remains that annual CPI inflation has now been below the CPI inflation target midpoint for the last 2 ½ years, and annual movements for tradable prices have been below 2% for the last 8 years.
"This, combined with low readings for core consumer price inflation, suggest there is a structural (long-lasting) element to the inflation process.
"The RBNZ remains confident that the economy will respond to the 75bps of OCR cuts already delivered over 2019.
"Given our concerns over the domestic and global outlook, we are not so sure. We expect growing spare capacity in the NZ labour market and economy in general to increase, dampening medium-term inflationary pressure.
"The OCR looks set to move lower still, with a 25bp cut in November and a follow-up 25bp cut in early 2020 taking the OCR to a record low 0.50%."
ANZ economists see the OCR falling lower to 0.25% by May 2020.
"With headline inflation likely to linger below 2% for some time, inflation expectations are at risk of slipping further and reinforcing low inflation into the future," ANZ's Sharon Zollner and Michael Callaghan said.