Inflation slowing but remains too high, economists say

Inflation, dubbed “nobody’s friend” by Reserve Bank governor Adrian Orr, is expected to have fallen to its lowest level since December 2021 – but it remains too high.

The latest inflation data for the June quarter, due for release on Wednesday, will likely show prices rose at a 5.9% annual pace, the lowest level since December 2021, according to forecasts from ANZ, ASB and Westpac.

That’s down from a 6.7% annual rate in the March quarter, and a peak of 7.3% in the June quarter last year, and would be weaker than the Reserve Bank’s 6.1% forecast in its May monetary policy statement.

The Reserve Bank Te Pūtea Matua has been rapidly increasing interest rates since October 2021, pushing up the official cash rate by 525 basis points to 5.5%, its highest level since 2008, as it sought to slow the economy and stamp out inflation.

But Westpac senior economist Satish Ranchhod notes there is still “a long road back” to the Reserve Bank’s inflation target of 1% to 3%.

“While inflation is dropping back, it is not low by any stretch of the imagination,” Ranchhod said in an inflation data preview titled: Lower inflation, not low inflation.

“With strong and persistent underlying price pressures, inflation is unlikely to return within the RBNZ’s target band any time soon.”

Ranchhod expects the fall in the annual inflation rate to be almost entirely due to petrol prices, which are 16% lower than this time last year.

Prices at the pump spiked early last year in response to the Russia-Ukraine conflict but have since fallen, and local fuel taxes were temporarily reduced, he said.

Housing costs have also moderated.

“Construction costs charged higher in the early stages of the pandemic in response to low interest rates and shortages of materials. Now, while build costs remain high, a slowdown in building activity and an easing in supply chain pressures has seen price growth slowing sharply,” he said.

Still, “sticky” underlying price pressures mean that inflation is unlikely to return to the target band until the latter part of next year, he said.

Ranchhod expects food prices to be the largest contributor to the quarterly inflation data.

Food prices rose 2.2% over the past three months and were up an “eyewatering” 12% over the past year, with sizeable increases in the prices of groceries and takeaway foods while poor weather conditions pushed up fresh produce, he said.

Housing costs also continued to weigh on inflation, with rents up 1.1% over the past three months and 4.3% over the past year. While housing costs had slowed, Westpac still expected a 0.9% increase in new house prices over the quarter, he said.

ASB senior economist Kim Mundy said the inflation data was expected to reinforce that the Reserve Bank was “on track” to bring inflation back down to target.

However while it was moving in the right direction, inflation remained high and well above the Reserve Bank’s target, she said in a note titled: A gradual descent.

ASB believes the benchmark interest rate has peaked at 5.5% but doesn’t expect cuts until May next year.

Economists will be honing in on non-tradable inflation, which is generated domestically and can be influenced by the Reserve Bank.

ASB expects non-tradable inflation to have slowed to an annual rate of 6.4% in the June quarter from a peak of 6.8% in March.

“Inflation is likely to continue its gradual descent, but the pace of the slowdown will keep the RBNZ wary, and of the view that restrictive settings will need to remain in place for some time,” Mundy said.

ANZ economists believe the relative resilience and sticky non-tradables inflation means the Reserve Bank will hike interest rates again this year by another 25 basis points, taking the official cash rate to 5.75%.

“We think it’s too early for any complacency that the fight against inflation is done and dusted, given the relative resilience of the labour market, the sizeable injection of fiscal stimulus in the next 12 months, the rapid increase in migration, a housing market showing signs of life, and a cautious turn in sentiment among consumers and businesses,” ANZ said in its inflation preview titled: Running before we walk.

While things were definitely going the right way, there was a long way to go, ANZ said.

“We suspect that squeezing that last excess inflation out of the system could be an uphill slog.”