logo
Inflation Hurts. When Will It End?

Inflation Hurts. When Will It End?

Scoop5 days ago
Press Release – Kiwibank
The rapid deceleration in imported inflation, which helped to pull down headline, is reversing course. Were no longer importing deflation. Annual tradables inflation lifted from 0.3% to 1.2%. The 4.2% increase in food prices accounted for 28.5% of …
Kiwi inflation lifted to 2.7%yoy from 2.5%yoy over the June quarter. But context is key. A reacceleration in imported inflation is driving the move higher. It was food and electricity that continues to bite at our back pockets. Domestic price pressures are cooling.
This is the first test for an August cash rate cut. Inflation will likely push further from here. But more important to policy is underlying inflation, which remains within the RBNZ's target band. Spare capacity within the Kiwi economy is keeping downward pressure on domestically generated inflation.
Downside risks to medium-term inflation remain. Whether that's a consequence of a slowdown in global economic growth, or a diversion of trade marked at a discount. There is still a case for more accommodative interest rate settings.
Kiwi inflation accelerated over the June quarter. Annual headline rose to 2.7% from 2.5%. It's a move in the wrong direction. But context is key. A strengthening in imported inflation is driving headline higher. But domestic price pressures, on balance, continue to cool. And most importantly, the underlying trend in consumer prices is weak. Excluding the volatile movements in food and fuel, annual core inflation lifted to 2.7% from 2.6%. A move that was better than many had feared, and one that will improve into next year. For now, there's little risk this bout of high inflation will persist. Especially given that there's still significant spare capacity in the Kiwi economy.
Today's report showed that price increases are becoming less extreme. The proportion of goods and services that increased in price was little changed at 54%. However, the June quarter saw a greater share of the basket record a decline in price, from 30% (185 items) to 35% (210 items). A larger proportion of items either remained flat or increased in price by less than 3 percent in the 12 months to June 2025.
The rapid deceleration in imported inflation, which helped to pull down headline, is reversing course. We're no longer importing deflation. Annual tradables inflation lifted from 0.3% to 1.2%. The 4.2% increase in food prices accounted for 28.5% of the lift in headline inflation.
Domestic inflation, in contrast, continues its (slow) move south. Annual non-tradables inflation pierced below 4% for the first time in four years to 3.7%. Domestic inflation has fallen some way from its 6.8% peak in 2023, but it is still sitting high above the long-term average (~3%). And that's despite such a weak domestic economy. Such persistence is due to the lingering strength in administered prices. Council rates and insurance costs are running well above historic averages, up 12.2%yoy and 6%yoy, respectively. And households are now contending with high electricity charges, climbing to 9.1%yoy. If we exclude housing-related inflation, domestic inflation prints at 3.5% – the lowest since December 2021. Given excess capacity still sloshing in the economy, domestic inflation should continue to head lower. But the pace of easing is being dictated by factors largely outside of the RBNZ's control. That's a frustration.
Inflation will likely push higher in the coming quarter. But like any spike, it will come back down. The economic undercurrents are weak. For monetary policy, the underlying trend in inflation is what matters most. Monetary policy settings today, are set for an economy 12-to-24 months down the track. It takes a long time for movements in the cash rate, and other lending rates, to influence the economy. So, a knee-jerk reaction to a couple of internationally charged price shocks is not on the cards.
The RBNZ's job is to look through volatile movements, and set policy for late next year. And in late 2026, inflation is set to slow below the mid-point of the target band (2%). It's why we focus more on core. Core measures of inflation strip out the volatile price movements. Encouragingly, core inflation has been trending south since hitting the 6.7% peak at the end of 2022. At 2.7% (in the year to June 2025), core inflation remains within the RBNZ's target band. Our forecast stirps out the spikes and looks at slack in the economy. And there's a lot of slack, especially in the labour market. Our best guess, incorporating the damage inflicted through the recession we're still crawling out of, has inflation falling to 1.8% next year. If realised, the RBNZ continues to overcook. And we continue to advocate a stimulatory setting of 2.5%.
Orange background

Try Our AI Features

Explore what Daily8 AI can do for you:

Comments

No comments yet...

Related Articles

South Island surges ahead as regional economic divide deepens
South Island surges ahead as regional economic divide deepens

NZ Herald

time5 minutes ago

  • NZ Herald

South Island surges ahead as regional economic divide deepens

'Interest rates have come down, which is starting to ease pressure, but many households and businesses are still doing it tough.' Kiwibank General Manager Troy Sutherland said 'The further south you go the better the business climate seems… That pretty much sums up our latest look into the regions.' Southland retained its top spot, buoyed by sustained construction and a regional building boom. Otago, meanwhile, leapt to a score of 5 thanks to a sharp rebound in international tourism and an 8% increase in employment - the strongest growth in the country. 'Our friends from across the ditch are lacing up their boots and hitting the ski fields,' said Sutherland. 'The few Americans that have a map beyond the USA are exploring the edge of the Earth. And Chinese visitor arrivals are finally recovering.' Economic activity has improved across most of the country, with the average score lifted from 3/10 to 4. Image / Kiwibank Canterbury's economy remains steady at 4 out of 10, with post-earthquake infrastructure works and a relatively strong housing market driving momentum. House prices there are up 1.5% year-on-year, compared to the national average decline of 0.3%. Despite strong commodity prices and a weak New Zealand dollar boosting rural incomes, Kiwibank notes many farmers remain cautious. 'Like many other households and businesses, crawling out of a recession means rebuilding equity. That's step one,' Sutherland said. 'Once balance sheets are in better shape, there's reason to spend. And once demand in the economy strengthens, there's reason to invest. We're not quite there yet.' The story in the North Island is less rosy. The average economic score across Te Ika-a-Māui is stuck at 3.2, with a wide range of performance. Taranaki, Northland and Gisborne all saw their scores decline, with Taranaki posting the country's largest drop in employment at -8%. 'Regions like Taranaki, Northland and Gisborne are going backwards,' said Kerr. 'These regions are grappling with falling employment, softer housing markets and softer activity across the board.' Otago and Southland are New Zealand's economic bright spots. Photo / Mark Mitchell Gisborne saw the weakest housing activity, recording no growth in house sales in the three months to May. Northland experienced a double-digit drop in new dwelling consents and scored just 2.6 out of 10, making it one of the worst-performing regions in the country. Not all is bleak in the north. Manawatū-Whanganui was crowned 'Most Improved,' with strong employment growth and infrastructure investment lifting its score nearly two points. Auckland rose to 4, buoyed by continued population growth, and Wellington improved modestly from 2 to 3, though employment and housing remain soft. 'Retail sales remain subdued,' said Kerr. 'Wellington recorded the steepest annual decline at -3.3%, but some regions like Waikato and the Bay of Plenty showed signs of improvement.' Even in cities where the numbers improved, underlying challenges persist. Wellington's score may have risen, but its unrounded score is just 2.7, and house prices in the capital have fallen more than anywhere else in the country. With interest rates falling and a wave of mortgage refixing expected, Kiwibank economists are hopeful this will free up household budgets and spur an eventual broader economic rebound. 'There's a Nazaré-type wave of mortgage refixing due,' said Sutherland. 'The move onto lower rates should help improve household disposable incomes, boosting consumption, supporting the housing market and wider business activity. But we may have to wait until summer for things to heat up.'

'Brought to its knees': Why NZ can't shake the recession
'Brought to its knees': Why NZ can't shake the recession

Otago Daily Times

timean hour ago

  • Otago Daily Times

'Brought to its knees': Why NZ can't shake the recession

By Susan Edmunds of RNZ New Zealanders were told to "survive til '25" for the economy to pick up - but now one major bank economist says it's probably going to be 2026 before any real improvement happens. Kiwibank's latest Annual Regional Note shows small improvements across the country, but weak scores overall. The national average score has lifted from three out of 10 to four. Southland and Otago top the table at five. Otago was boosted by a recovery in international tourism and improvement in employment. Northland, Taranaki and Gisborne went backwards. Taranaki had the biggest fall in employment of anywhere in the country, at 8 percent. Northland reported a double-digit drop in building consents. Retail sales remain below their average levels over the past decade in most regions, as weak household confidence weighs on consumption. Kiwibank said Wellington recorded the steepest annual decline at a -3.3 percent, while regions like Waikato, Northland and the Bay of Plenty experienced a slight improvement on last year. 'Wellington is just more pessimistic' Wellington's score improved from a two out of 10 to a three out of 10 while Auckland lifted from a three to four. "Wellington is just more pessimistic," Kiwibank chief economist Jarrod Kerr said. "It's gone through a lot in recent years. You can see it in their activity, you can see it in the housing market. You can see it in the economy, the city has been brought to its knees and it's been struggling to shake the pessimistic vibe." He said both Auckland and Wellington were well below average. "If you look across the regions, some of them have gone backwards and others are improving but it's not good. "When you look at the South Island things are better, people are definitely more optimistic in the South Island but even then the top scoring regions get a five out of 10." He said the report helped solidify the view that rate cuts to date had not been enough to turn around the economy. "We're really crawling out of this recession rather than regaining our footing and looking to grow from here. We're still struggling across the entire country." He said Kiwibank customers last year had talked about needing to hold on until this year. "We are halfway through the year and, yes, things are better but only by a little bit." Worse off than Australia New Zealand was worse off than Australia, he said. "Their economy is much stronger than ours but in their terms it's soft… where everything washes out is the labour market and, you know, the unemployment rate tells you a lot. Our unemployment rate is over 5 percent and theirs is pretty close to 4 percent." Part of the reason was the more aggressive interest rate hikes from the Reserve Bank, he said. "We were much more aggressive in our rate hikes than in Australia. We were much more aggressive on inflation than across the Tasman. "I think both the RBA and RBNZ made mistakes as I think every central bank did through the Covid period, we overstimulated in hindsight but at the time it was the right thing to do. And then we had to deal with the inflation problem." He said the Reserve Bank had kept the official cash rate at 5.5 percent for too long as it worked to tackle inflation. "We had a really bad recession last year, which the Reserve Bank openly orchestrated, they said 'look, we need a recession to get inflation back down'. The Australians didn't orchestrate a recession, they didn't slam the economy into the floor." Kerr said recovery was still coming but he had hoped it would have started more obviously by now. "We're hoping it takes off in the second half of this year as more and more people refix on to lower rates. Then it's more of a 2026 story now."

'Brought to its knees': Why NZ can't shake the recession
'Brought to its knees': Why NZ can't shake the recession

RNZ News

time2 hours ago

  • RNZ News

'Brought to its knees': Why NZ can't shake the recession

Photo: RNZ / Rebekah Parsons-King New Zealanders were told to "survive til '25" for the economy to pick up - but now one major bank economist says it's probably going to be 2026 before any real improvement happens. Kiwibank's latest Annual Regional Note shows small improvements across the country, but weak scores overall. The national average score has lifted from three out of 10 to four. Southland and Otago top the table at five. Otago was boosted by a recovery in international tourism and improvement in employment. Northland, Taranaki and Gisborne went backwards. Taranaki had the biggest fall in employment of anywhere in the country, at 8 percent. Northland reported a double-digit drop in building consents. Retail sales remain below their average levels over the past decade in most regions, as weak household confidence weighs on consumption. Kiwibank said Wellington recorded the steepest annual decline at a -3.3 percent, while regions like Waikato, Northland and the Bay of Plenty experienced a slight improvement on last year. Wellington's score improved from a two out of 10 to a three out of 10 while Auckland lifted from a three to four. "Wellington is just more pessimistic," Kiwibank chief economist Jarrod Kerr said. "It's gone through a lot in recent years. You can see it in their activity, you can see it in the housing market. You can see it in the economy, the city has been brought to its knees and it's been struggling to shake the pessimistic vibe." He said both Auckland and Wellington were well below average. "If you look across the regions, some of them have gone backwards and others are improving but it's not good. "When you look at the South Island things are better, people are definitely more optimistic in the South Island but even then the top scoring regions get a five out of 10." He said the report helped solidify the view that rate cuts to date had not been enough to turn around the economy. "We're really crawling out of this recession rather than regaining our footing and looking to grow from here. We're still struggling across the entire country." He said Kiwibank customers last year had talked about needing to hold on until this year. "We are halfway through the year and, yes, things are better but only by a little bit." New Zealand was worse off than Australia, he said. "Their economy is much stronger than ours but in their terms it's soft… where everything washes out is the labour market and, you know, the unemployment rate tells you a lot. Our unemployment rate is over 5 percent and theirs is pretty close to 4 percent." Part of the reason was the more aggressive interest rate hikes from the Reserve Bank, he said. "We were much more aggressive in our rate hikes than in Australia. We were much more aggressive on inflation than across the Tasman. "I think both the RBA and RBNZ made mistakes as I think every central bank did through the Covid period, we overstimulated in hindsight but at the time it was the right thing to do. And then we had to deal with the inflation problem." He said the Reserve Bank had kept the official cash rate at 5.5 percent for too long as it worked to tackle inflation. "We had a really bad recession last year, which the Reserve Bank openly orchestrated, they said 'look, we need a recession to get inflation back down'. The Australians didn't orchestrate a recession, they didn't slam the economy into the floor." Kerr said recovery was still coming but he had hoped it would have started more obviously by now. "We're hoping it takes off in the second half of this year as more and more people refix on to lower rates. Then it's more of a 2026 story now."

DOWNLOAD THE APP

Get Started Now: Download the App

Ready to dive into a world of global content with local flavor? Download Daily8 app today from your preferred app store and start exploring.
app-storeplay-store