Inflation climbs but cooling trend supports August cut
New Zealand’s annual inflation ticked higher to 2.7% in the June quarter, up from 2.5% in March, but economists say the underlying trend remains contained – and the Reserve Bank (RBNZ) could still cut the official cash rate (OCR) in August.
Quarterly CPI print softer than expected
Consumer prices rose by 0.5% in Q2 2025, below Westpac’s 0.6% forecast and slightly under the market consensus.
“The June quarter inflation result was a little below the 0.6% rise we expected,” said Satish Ranchhod (pictured left), senior economist at Westpac NZ.
“While [the] result was in line with the RBNZ’s last published forecast from May, their July policy statement indicated that they were braced for a stronger result. We suspect today’s result was actually a little on the low side of what the RBNZ had anticipated.”
The latest “result won’t have done much to change the RBNZ’s mind relative to the cautious easing bias it signalled at its recent policy review. We continue to expect another 25bp cut in August.”
ASB chief economist Nick Tuffley (pictured centre) agreed the print strengthens the case for easing.
“Consumer prices increased 0.5% in Q2 with annual inflation ticking up to 2.7%, between the market consensus and the RBNZ pick,” Tuffley said. “We expect a 25bp OCR cut in August with the possibility of a sub-3% OCR by year-end.”
Food and power drive headline inflation
Key drivers of Q2 inflation included:
- Food prices, which rose 1.6% over the quarter, driven by seasonal increases in vegetables and higher costs for dairy and grocery staples
- Household energy, which jumped 4.7% due to higher transmission and lines charges
These were partly offset by a 5% drop in petrol prices, helping keep overall inflation in check.
“There has also been a large increase in household energy prices… That’s in part due to increases in lines and transmission charges,” Ranchhod said.
Rents and new home prices cooling
Housing-related inflation showed further signs of easing:
- Rents rose just 0.8% in Q2, with annual rental inflation down to 3.2% – the lowest since 2021
- The cost of building a new home declined 0.1% over the quarter and is up just 0.8% annually – the smallest annual gain since 2009
“The cost of purchasing a newly built home was down -0.1% in June quarter, and is up just 0.8% over the past year,” Ranchhod said. “That’s the smallest annual increase since 2009 and reflects the protracted downturn in building activity over the past year.”
Core inflation stable, not sliding
While headline inflation rose slightly, underlying measures remain within the RBNZ’s target band:
- Trimmed mean inflation: 2.5%
- Weighted median: 2.2%
- Excluding food, fuel, and energy: 2.7%, up from 2.6%
“While increases in the prices of volatile items like food have pushed inflation higher in recent months, the longer-term trend in inflation looks better contained,” Ranchhod said.
Mary Jo Vergara (pictured right) of Kiwibank echoed that view: “Underlying inflation, which remains within the RBNZ’s target band... is what matters most.”
Rate cut still expected despite short-term lift
Despite the slight rise in annual inflation, the overall tone among economists remains dovish.
“This is the first test for an August cash rate cut... But more important to policy is underlying inflation, which remains within the RBNZ’s target band,” Vergara said. “Our best guess... 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%.”
See the latest inflation data here. For more insights, read the commentaries from Westpac, ASB, and Kiwibank.
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