Inflation hits 6% amid falling petrol prices and high-interest rates

During the June quarter, New Zealand experienced a decrease in inflation, which dropped to an annual rate of 6%. The key factors behind this decrease were primarily high-interest rates impacting household budgets and a reduction in petrol prices. Despite these influences, the persistence of high domestic inflation remains noteworthy.

The consumer price index saw a minor rise of 1.1% between March and June, marking the smallest increase since the first quarter of 2021. Prices continue to rise at unprecedented rates unseen since the 1990s. However, the pace of growth has decelerated over recent quarters. The Reserve Bank of New Zealand foresaw this trend and decided to keep the Official Cash Rate (OCR) steady at 5.50%.

The global drop in oil prices, triggered by Russias invasion of Ukraine, led to decreased petrol prices at pumps, contributing to the lowering of headline inflation. However, these savings were counterbalanced by a significant surge in food prices, which increased by more than 12% over the past year. Adverse weather conditions in the North Island escalated the cost of fresh produce by 21% YoY, while grocery and restaurant costs also rose.

Housing, being the largest category in the consumer price index, was the second major contributor to headline inflation. Rent rose by 4.2% and construction costs escalated by 7.8% annually. Concurrently, the cost of constructing a new home skyrocketed by over a third in the past three years, despite a nearly 16% fall in house prices from their peak.

While international hotel room prices are on the rise, international airfares dropped by 11.9%, beginning to revert to pre-Covid prices. This reduction in headline inflation is partially due to the Ukraine-related price shocks, such as petrol prices, being excluded from the annual calculation.

Despite the central banks relief at the receding headline inflation, domestic price increases persist. Annual non-tradable inflation remained at a record 6.8% in the March quarter, finally decreasing to 6.6% in the June quarter. This indicates that domestic inflation may have also reached its peak.

The RBNZ, in its monetary policy review last week, projected core inflation to decline as capacity constraints eased. However, they did not provide a specific timeline for this. Inflation has been falling globally, with the US annual rate dropping to 3% in May and Australias annual rate falling to 5.6% in May.

Despite these encouraging signs, the next quarter is likely to witness additional inflation pressure as government fuel tax cuts and public transport subsidies ended on July 1. Cyclones and flooding are expected to impact the economy in the next quarter. Despite these challenges, financial markets and some economists forecast that the Reserve Bank will raise the OCR by another 25 basis points before the end of the year.