Inflation is at its highest since mid-2024, but economists say the spike is temporary and the figure is somewhat misleading
Consumer prices rose 1% in the September quarter, pushing annual inflation to 3% - the highest rate since mid-2024. But economists say don't panic: the spike should be short-lived.
ASB expects the period of circa 3% annual inflation to be temporary, with a large margin of spare capacity and softer domestic conditions expected to pull inflation back down towards the Reserve Bank's 2% target from next year.
The September quarter result matched what the Reserve Bank had forecast, though it had hinted recently that inflation might crack 3%.
What pushed prices up?
The two main culprits are food and housing costs.
Food prices jumped 1.8% over the quarter, while housing costs rose 1.4%. Within housing, the biggest hits came from skyrocketing council rates and a 2.7% spike in energy prices.
There's some good news buried in the numbers, though. With fewer people moving to New Zealand and the housing market staying flat, construction costs and rents are expected to ease.
Mark Smith, senior economist at ASB, said the headline 3% figure is misleading because it's being inflated by one-off cost increases that don't reflect broader price pressures.
ASB estimates that cost increases from rates, insurance, electricity, and tobacco have accounted for roughly 30% of annual non-tradable inflation. Higher local authority rates alone are expected to account for around half of the quarterly increase in non-tradable prices. When you strip out these cost-driven influences, underlying inflation is actually running closer to 2%.
What does this mean for your mortgage?
The inflation data supports expectations of more OCR cuts, which should eventually flow through to lower mortgage rates. ASB expects a 25 basis point cut in November, with the risk that the OCR could drop below 2.25% if the economy stays weak.
But the path from here isn't certain – it all depends on what happens over the next few months.
"I think RBNZ's comments will be the most important in the near-term,” senior economist Chris Tennent-Brown (pictured) told NZ Adviser.
“What they say in November will be key – but then, it's a long time for things to happen. We'll have around three months of data from November through to the next meeting.”
"That data is everything from economic activity like GDP, which is what led to the bigger rate cut that we got this month. We’ll have one more release of that before the end of the year. All the housing data will be key for us to watch to see if there's any sign of life in what's been a very sluggish housing market.”
Tennent-Brown says that how the interest rate-sensitive part of the economy is responding to stimulus is going to be important to monitor.
Looking overseas, one unexpected upside from recent global economic jitters is lower mortgage rates.
“That’s the silver lining,” Tennent-Brown said. “There’s renewed concerns about tariffs threatening the global growth outlook, that'll be important for both Australia and New Zealand. Likewise, for longer-term rates over 5-10 years in the wholesale markets are influenced by global inflation and global central bank development."
Don't try to time the market
If you're deciding when to fix your mortgage, Tennent-Brown says that it isn’t worth trying to guess the low point.
"People need to have a strategy based on what they're trying to achieve,” he said. “Hopefully that's trying to lower their interest rate over the entire period of the loan, not just trying to pick the bottom of the mortgage market at the expense of paying higher rates to do it."
The bigger picture
While 3% inflation is well down from the COVID-era peaks, Kiwis are still feeling the pinch. Household costs have climbed about 25% since the end of 2019, with even bigger jumps for essentials like food and housing.
The good news is that ASB expects inflation to keep trending down towards 2% through 2026, driven by spare capacity in the economy and cooling wage growth.
The wildcard is what happens globally. Trade tensions and their impact on inflation could complicate things. Upcoming inflation expectations surveys will be important – they'll show whether households and businesses think this 3% spike is temporary or something more stubborn.
