Above Target Today. Below Target Tomorrow

• Kiwi inflation likely lifted to 3%yoy from 2.7%yoy over the September quarter. But context is key. A reacceleration in imported inflation is driving the move higher. Domestic price pressures continue to cool, on balance.
• It is the more volatile components of CPI that are pushing the headline rate higher. Food and administered prices have shown lingering strength. But that’s being offset by a softening in prices for the more interest rate sensitive components within the CPI basket.
• It’s widely expected that inflation will lift towards the top of the RBNZ’s target band. But the underlying trend is more important. Core inflation remains within the target band. There’s significant spare capacity still sloshing in the system, And downside risks to medium-term inflation remain. Inflation is at risk of falling below the 2% sweet spot in 2026.

Kiwi inflation data is due out on Monday. By our calculations, consumer prices likely rose 0.9% over the September quarter. Such a move would see an acceleration in annual inflation, from 2.7% to 3%. After a welcome drop to 2.2% in late 2024, inflation has climbed to the top of the RBNZ’s 1-3% target band. But context is key. A strengthening in imported inflation is driving headline higher. But domestic price pressures, on balance, continue to cool. For now, we think the risk is low that this bout of high inflation will persist. Because there is significant spare capacity still sloshing in the economy, keeping downward pressure on medium-term inflation. And inflation expectations – most importantly – remain well anchored to the 2% target midpoint.

As reiterated at the October policy update, the RBNZ anticipate this likely move to or even above the top-end of their 1-3% target range. It’s a frustrating move. But what will make it an easier pill to swallow is if measures of core inflation, at least, remain within the range. Indeed, the RBNZ’s job is to look through volatile movements in inflation, and set policy for late next year. And in 2026, inflation is set to slow below the mid-point of the target band (2%). Core measures of inflation strip out the volatile price movements. And encouragingly, core inflation has been trending south since hitting the 6.7% peak at the end of 2022. We expect the measures of core inflation to remain within the RBNZ’s target band.

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