Up, Up, But Not Away. Inflation Is Not Here To Stay

• Kiwi inflation lifted to 3%yoy from 2.7%yoy over the September quarter. But context is key. A reacceleration in imported inflation as well as sticky administered costs are driving the move higher. Broadly speaking, domestic price pressures continue to cool.
• It is the more volatile components of CPI that are pushing the headline rate higher. Council rates alone were up 8.8% over the quarter. And electricity bills have climbed to highest annual rates since the 1980s. The more interest rate sensitive components within the CPI basket however are clearly soft.
• Inflation has climbed to the top end of the RBNZ’s target band. But it stops there. We continue to expect inflation to return towards the RBNZ’s 2% mid-point in early 2026. And beyond that, see further risk of inflation falling below the 2% sweet spot over the course of the year

At 3%, Kiwi inflation has climbed back to the top of the RBNZ’s target band. Over the quarter, consumer prices rose by 1%. There was little in today’s data that surprised. The factors driving inflation higher, like food and administered costs, should prove temporary. While the more interest rate sensitive components of CPI, like rents and construction costs, are clearly soft. For now, we think the risk that this bout of inflation will persist is low. Because there is significant spare capacity still sloshing in the economy, and keeping downward pressure on medium-term inflation. More importantly, inflation expectations remain well anchored to the 2% target midpoint.

The September quarter will likely mark the peak in inflation. The current December quarter is also typically the weakest quarter for inflation with seasonally weak food prices as well as the usual retail discounting that takes place. With that in mind, we expect inflation to fall back below 3% from here. And the risks further out are still tilted to the downside as the economic undercurrents are weak.

Today’s result was largely in line with the RBNZ’s forecast. The move to 3% is unwanted. But it shouldn’t stand in the way of the RBNZ delivering further rate cuts. They should take comfort in underlying inflation which remains subdued. Core measures of inflation strip out the volatile price movements. And encouragingly, core inflation fell from 2.7% to 2.5% - still within the RBNZ’s target band and the lowest since March 2021. It is the RBNZ’s job 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%). We continue to expect a move to 2.25% in the cash rate next month.

© Scoop Media