The latest economic data from New Zealand paints a complex picture of inflation, with some signs of moderation but ongoing challenges. While the Selected Price Indexes (SPI) suggest inflation is cooling, economists remain cautious about the Reserve Bank of New Zealand's (RBNZ) next move, predicting further increases in the Official Cash Rate (OCR).
The SPI, which accounts for about 47% of the contributors to the quarterly Consumers Price Index (CPI), indicates a monthly drop in fuel prices during July, with petrol prices down 5.7% and diesel prices dropping 12.1%. However, this was offset by a surge in domestic and international airfares, with monthly domestic airfares rising 20.7% and international fares increasing 10.9%.
Economists like Mark Smith from ASB and Doug Steel from BNZ predict the RBNZ will continue to increase the OCR, with Smith suggesting a peak of 3.25% by the end of the year. This aligns with the RBNZ's projection of annual headline inflation dropping to 3.3% in the September quarter, down from the June quarter's peak of 4.1%.
Smith highlights the importance of spare capacity in the New Zealand economy, which could help moderate inflation. He believes that annual inflation is cooling from its peak, with CPI inflation moving towards 3.5% by the fourth quarter and settling in the low 2% range from the second half of 2027. However, he also acknowledges the risks, including the possibility of a generalized and persistent uplift in inflation.
Satish Ranchhod from Westpac and Miles Workman from ANZ share similar concerns. Ranchhod notes that while some price pressures are softer than expected, the latest SPI figures signal some downside risk to their inflation projections. He highlights the large monthly fall in meat prices and the softness in alcohol prices, household energy prices, and housing rents. However, he warns that elevated global fuel prices could lead to ongoing strength in airfare prices.
Workman agrees that the SPI figures came in weaker than expected, suggesting some downside risk to their 3.9% CPI projection for the September quarter. He emphasizes that the surprise came from both volatile and persistent components, including rents, which remained weak.
Despite these concerns, Steel from BNZ maintains their inflation projection of 3.7% for the September quarter, supporting the view that annual CPI inflation peaked in the second quarter. However, he acknowledges that inflation remains above the RBNZ's target range, with firm levels of core inflation.
In conclusion, while the SPI suggests some moderation in inflation, economists remain cautious about the RBNZ's next move. The ongoing challenges in airfare prices and the lingering effects of the oil shock could impact the OCR and inflation trajectory. As Smith notes, predicting tradable CPI inflation is difficult due to rapidly changing global developments, making it crucial to closely monitor both global and local developments.
