Inflation slows to lowest rate in more than two years

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Inflation has slowed to its lowest level in more than two years, but domestic price pressures remain stubborn and will slow any move to cut interest rates.

Stats NZ figures showed consumer prices rose 0.5 percent in the three months ended December, taking the annual inflation rate down to 4.7 percent from 5.6 percent, the lowest since June 2021.

The figures were exactly in line with economists’ expectations, but below the Reserve Bank’s November forecast of a 0.8 percent rise.

Higher costs of building and running a house, such as rates, rent and insurance, drove the quarterly increase offsetting cheaper food and fuel.

“The price of housing increased over 2023. Rent is 4.5 percent more expensive than at the end of last year,” Stats NZ senior manager of prices Nicola Growden said.

“Prices for about one-third of all items in the CPI basket decreased in the December 2023 quarter, the most in over three years.”

However, the numbers showed that domestic factors – so-called non-tradables – are now the dominant driver of inflation, rising 1.1 percent for the quarter and 5.9 percent for the year.

Core inflation measures, which eliminate more volatile components, were at 5 percent.

Economists predicted a 0.5 percent increase in prices for the quarter, and 4.7 percent for the year.

In November the RBNZ expressed its impatience at the slowness in inflation’s decline and even threatened a further rate rise if progress was not made.

Financial markets are putting an 80 percent chance of an OCR cut to 5.25 percent in May, and definitely two cuts by the end of the year.

Recent numbers have shown the economy slowing markedly with weaker activity in the manufacturing and services sectors, and soft consumer spending, with some economists already suggesting the economy is in recession which would back the case for lower rates.

Delightfully boring

Kiwibank’s chief economist Jarrod Kerr called the numbers “delightfully boring”, and said the slowing would help cement lower inflation expectations.

“Psychologically, we now have 4 percent in the back of our minds when it comes to setting prices. That’s a big shift from 7 percent. Today’s move … should reinforce the downward momentum in expectations.”

He said there were hurdles ahead such as rising shipping costs because of the Red Sea attacks, and the impact of record migration gains on rents.

“We’re on track for inflation hitting the top end of the RBNZ’s target 1-3 percent target band by the second half of this year. Which means rate cuts are not too far away.”

Meanwhile, Council of Trade Unions economist Craig Renney said the numbers showed no significant impact of government spending on inflation, which should reshape the new government’s approach.

“Promises to reduce current inflation by cutting public spending should be treated with a high degree of caution. Instead those cuts will simply hurt those who use those services, with little or negative economic benefit overall,” Renney said.