Soft prices strengthen case for longer rate pause
New Zealand’s latest selected price data suggests inflation is still easing, even as some categories remain stronger than expected.
Westpac senior economist Satish Ranchhod (pictured left) says November’s consumer price update was “a bit firmer than we expected”, largely due to volatile travel costs. He notes this “means the risks to our forecast for a 0.3% quarterly rise in the overall CPI (out 23 January) are tilted to the upside.”
Westpac’s 0.3% pick is already above the Reserve Bank’s (RBNZ) November Monetary Policy Statement forecast for a 0.2% rise. The bank expects both tradables and non‑tradables inflation to be a little hotter than the RBNZ anticipated in the December quarter, with tradables doing most of the lifting.
Even so, Ranchhod, in a new Westpac analysis, says their projections are “consistent with a gradual easing in inflation over the coming year from its current level of 3% in the year to September.” By mid‑2026, Westpac expects inflation to be comfortably within the RBNZ’s 1%–3% target band, helped by continued softness in housing‑related costs.
On the detail, domestic airfares rose 6.5% in November, close to forecast, while international airfares rose 0.4%, stronger than expected. Holiday accommodation costs also increased by more than anticipated.
Rents, the largest single CPI component, were up just 0.1% over the month – another very weak result. Household energy prices were near expectations, with electricity up 0.8%, while alcohol prices were mixed, with beer up 0.6% and other items lower.
Food prices fall again, signalling relief for households
Food prices fell 0.4% in November, mainly due to the usual seasonal drop in vegetable prices. This pulled annual food inflation down to 4.4%, from 4.7% in October, and marked the third consecutive monthly fall – the first time that has happened since December 2023.
The latest Selected Price Index release covers around 47% of the CPI basket, making it a useful early indicator for the December quarter CPI figures due on 23 January. The monthly decline was driven by a 4.5% drop in fruit and vegetable prices, with tomatoes, strawberries, cucumbers and lettuce among the main contributors.
Despite the monthly fall, annual food inflation of 4.4% remains underpinned by higher grocery and meat prices. Grocery food prices were up 4.6% over the year, while meat, poultry and fish prices rose 7.7%. Across the 12 months to November, the average price for milk was $4.91 per 2 litres, up 15.8% annually; porterhouse/sirloin beef steak averaged $45.39 per kg, up 26.7%; and a 600g white loaf averaged $2.13, up 53.2%. The milk and bread prices reflect the cheapest available options.
“Bread is a staple food for many households,” Stats NZ prices and deflators spokesperson Nicola Growden (pictured right) said in a media release. “It now costs 74 cents more for a loaf of white bread than this time last year.”
Rents hit lowest annual rise in over a decade
Rent prices have recorded their lowest annual increase since at least 2010, rising just 1.4% in the 12 months to November, down from 1.6% in October.
This aligns with Westpac’s observation of very subdued monthly rent growth and reflects a backdrop of rising housing supply and low population growth. Westpac expects rent inflation to remain subdued over summer, a period when rent increases would typically be larger.
Because food and rents together make up well over a quarter of the CPI basket, the combination of three straight monthly food price drops and the weakest rent inflation in over a decade bodes well for the December quarter inflation reading.
Implications for RBNZ and the OCR
Annual CPI inflation was 3% in the September 2025 quarter, right at the top of the RBNZ’s 1%–3% target range. RBNZ’s November MPS projected that inflation would ease to 2.7% in the December quarter, interest.co.nz reported.
Such an outcome would be important in allowing RBNZ to keep the official cash rate unchanged at 2.25% at its first 2026 review on 18 February.
Recent RBNZ communications have signalled that the central bank sees itself as having finished cutting the OCR, at a time when markets had expected more easing. That helped push wholesale, mortgage, and deposit rates higher.
If the December‑quarter CPI confirms that inflation is easing as forecast – supported by falling food prices and historically low rent inflation – it would give RBNZ greater flexibility to signal in February that the door to further cuts remains open, should conditions warrant it.
For now, the latest selected price data suggests inflation is gradually cooperating with the central bank’s plans, even as volatility in travel costs keeps some upward pressure in the near term.
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