Consumer prices rose by 0.5% in the December quarter. That saw annual inflation remaining at 2.2%. However, core inflation has continued to ease. The result was close to expectation.
Headline inflation
- Quarterly change: +0.5% (prev: +0.6%)
- Westpac forecast: +0.5%, RBNZ (November MPS): +0.4%
- Market median: +0.5%, range +0.3% to +0.6%
- Annual change: +2.2% (prev: +2.2%)
- Westpac forecast: +2.1%, RBNZ (November MPS): +2.1%, Market: +2.1%
Non-tradables
- Quarterly change: +0.7% (prev: +1.3%)
- Westpac forecast: +0.8%, RBNZ (November MPS): +0.8%
- Annual change: +4.5% (prev: +4.9%)
Tradables
- Quarterly change: +0.3% (prev: -0.2%)
- Westpac forecast: -0.1%, RBNZ (November MPS): -0.2%
- Annual change: -1.1% (prev: -1.6%)
Consumer prices rose 0.5 % in the December quarter. That saw the annual inflation rate remaining unchanged at 2.2%.
The December quarter inflation result was in line with our forecast and just slightly above the RBNZ’s last published forecast (which had been finalised back in November).
Importantly, measures of core inflation (which track the underlying trend in consumer prices) have continued to trend down towards the RBNZ’s target range. And domestic inflation (non-tradables) has also been gradually dropping back. Consequently, we don’t think today’s result will have been a big surprise for the RBNZ.
What underpinned inflation in the December quarter?
The largest contributors to December’s rise in consumer prices were travel and accommodation costs, which typically record larger increases over the holiday months. The past three months saw domestic airfares rising 9%, with international airfares up 7%. Similarly, holiday accommodation costs were up around 3%.
We also saw further solid increases in insurance premiums over the past three months. However, after very large increases over the past year, the pace of those rises is now easing off as many insurance policies have now rolled on to higher premiums.
Housing costs were again an important contributor to the rise in overall consumer prices. Rents were up 0.8% in the December quarter, leaving them up 4.2% over the past year. We also saw construction costs rising by 0.3%. However, on both of these fronts, pressures are not as strong as they have been in recent years.
The December quarter also a large 4.7% increases in used car prices, which can be volatile on a quarter-to-quarter basis.
Balanced against those increases, food prices (19% of the CPI) fell 0.5% over the quarter as a result of the usual seasonal fall in fresh produce prices. Petrol prices (4% of the CPI) were also down 1.3% over the quarter. The December quarter also saw continued softness in the prices of apparel.
Annual and core inflation
The annual inflation rate remained unchanged at 2.2% in the year to December. However, it is well down from the levels we saw in recent years and comfortably within the RBNZ’s target band.
Importantly, while the December quarter did see large increases in some specific areas, price and cost pressures more generally have continued to ease. That was reflected in measures of core inflation which have continued to trend down and are now back inside the RBNZ’s target band (Core inflation measures smooth through volatile quarter-to-quarter movements and instead track the underlying trend in prices. They are a key focus for the RBNZ when assessing the strength of inflation pressures.). In terms of specifics:
- Inflation excluding food, fuel and energy costs fell to 3.0% from 3.1% previously.
- Trimmed mean inflation fell to 2.4% from 2.5% previously
- Weighted median inflation fell to 2.6% for 2.8% previously.
The downtrend in overall inflation over the past year is in large part due to the low level of tradables inflation, which mainly relates to imported retail goods
- Tradable prices rose by 0.3% this quarter, leaving them down 1.1% over the past year. Tradables inflation was stronger than expected in the December quarter. However, that was mainly due to the large increase in used car prices. The broader trend in imported inflation remains soft.
- The fall in tradables prices has in part been due to a reversal of the tight global supply conditions that saw import prices rise sharply in recent years.
- The downward pressure on prices has been amplified by the pressures on household budgets and the related weakness in discretionary spending. That’s resulted in softness in the prices of a range of consumer goods like clothing.
- However, the downturn in imported inflation looks like it is now coming to an end, especially with oil prices pushing higher and the NZD dropping in recent weeks. Over the coming year, even though we don’t expect high levels of tradable inflation, it won’t have the same dampening impact on overall consumer prices that we saw in 2024.
On the domestic front, non-tradable prices rose 0.7% in the December quarter. That saw annual non-tradables inflation slowing to a still elevated rate of 4.7%. While that result was softer than we or the RBNZ expected, changes in how the cost of pharmaceutical products are recorded contributed to the surprise. More generally, the underlying trend in non-tradables inflation looks in line with expectations for a continued gradual easing in domestic prices.
- The strength in non-tradables inflation has been a key concern for the RBNZ in recent years. And we’re still seeing solid increases in cost such as local council rates and insurance premiums, which tend to be less sensitive to the level of interest rates. That’s limiting the decline in overall domestic inflation.
- However, price and cost pressures have been cooling in parts of the domestic economy that are sensitive to the high level of interest rates in recent years. For instance, weak demand over the past year has contributed to a marked slowdown in construction cost inflation and has also restrained price increases in the hospitality sector.
Implications
Overall inflation is close to 2%, and both core and domestic inflation are easing. In addition, economic activity was softer than expected through the latter part of last year. Against that backdrop, we expect that the RBNZ will deliver another 50bp cut when they next meet in February.
We expect inflation will remain well contained over the year ahead. However, the risks for inflation aren’t all to the downside, especially given the rocky global environment and downside risk for the New Zealand dollar. That will be an important area to watch over the coming year if inflation is to remain close to 2% on a sustained basis.
