Economists warn firm prices may delay further cuts
Monthly Selected Price Indexes for July rose more strongly than expected, with ASB senior economist Mark Smith (pictured) noting “a number of upward surprises for various components cumulating in a stronger than expected overall number.”
Annual food price inflation has climbed back to 5% and, according to Smith, “looks set to move higher.”
“Increases were more evident in areas of export commodity price strength (meat and dairy products) highlighting the downsides from a strong agricultural export sector,” he said, adding that while the monthly SPI data now covers less than half of the CPI regimen, “it provides a useful directional signal for overall CPI inflation.”
“It is still early days, but the July data confirms that the trajectory for annual CPI inflation is firming and is consistent with our view that annual CPI inflation will approach (and possibly top) 3% in Q3.”
While Smith expects inflation to move lower by year-end and into 2026 due to spare capacity, he warned the Reserve Bank “will be somewhat wary” and will watch readings for core CPI and inflation expectations closely.
Food and energy lead the price surge
ASB estimates show consumer prices rose 1% in July, pushing annual inflation to 4%. Food prices — with an 18.5% CPI weight — increased 0.7% in the month, in line with expectations, but annual food price inflation ticked up to 5.0%, the highest since November 2023.
Fruit and vegetables rose 4.3% in July (7.3% annually), with meat prices up 1.4% (7.9% annually), including annual beef and lamb inflation now above 20%. Dairy product prices also saw sharp rises, with fresh milk up 15% year-on-year and cheese up 17%.
Petrol rose 1.2% in July (-3.7% annually), while diesel prices climbed 2.3% (-7.2% annually). Household electricity and gas prices rose 0.9% in July, with electricity up 24% and gas up 44% since the start of the decade.
Airfares and accommodation push higher
Total airfare prices jumped 7.5% in July, after a 6.1% rise in June. International airfares were up 9% and domestic fares rose 2.8% in the month. Accommodation prices rose 3% in July, with annual inflation at 13.9%. International accommodation tariffs posted a 20.5% annual rise.
Population and migration trends weigh on housing market
Smith also highlighted that “net immigration inflows fell to fresh 2½ year low, with the 13,704 person inflow well below decade averages (49k) and more than 120k persons lower than the late 2023 peak (136k).”
Persistent high departures and lower arrivals reflect the “relatively weak position of the NZ economy,” the ASB economist said.
The slowdown in population growth is contributing to weaker consumer spending and a housing market that is “failing to fire despite 225bps of OCR cuts,” Smith said.
He expects a 25bp cut next week, taking the OCR to 3%, but sees “a sub 3% OCR” as possible by year-end.
Westpac warns inflation could top 3%
Westpac NZ senior economist Satish Ranchhod (pictured right) said July’s price update “was firmer than expected, reinforcing our expectations that overall inflation is heading back to 3% (or higher) before the end of this year.”
“Overall food prices rose another 0.7% in July, leaving them up 5% over the past year,” Ranchhod said, pointing to continued increases in fresh fruit, vegetables, meat, and milk prices.
He also highlighted a 1% rise in household electricity costs in July, leaving them 11% higher than a year earlier, and a 9% jump in international airfares.
On rents, Ranchhod said the 0.1% monthly rise was “a very low result, consistent with anecdotes of increased supply and downward pressure on rents in some regions.”
Implications for monetary policy
“The RBNZ has already noted that they expect inflation will rise back towards 3% in the latter half of the year,” Ranchhod said. “The details of [the latest] update indicate that it could rise even further… we’re also seeing firmness in other areas, like energy costs, which is unlikely to reverse.”
This, the Westpac economist added, “reinforces the likelihood” the RBNZ will take “a more cautious approach to policy easing beyond August.”
Read the ASB and Westpac insights for more information.
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