Rents, rates and education costs drive March quarter increase
New Zealand’s annual inflation rose slightly to 2.5% in the March quarter, up from 2.2% in December, according to new data released by Stats NZ.
“The annual inflation rate is within the Reserve Bank of New Zealand’s target band of one to three per cent for the third consecutive quarter,” said Nicola Growden (pictured upper left), Stats NZ prices and deflators spokesperson.
While inflation appears relatively controlled, major contributors like rent, local authority rates, and education are continuing to place pressure on household budgets.
Housing-related costs dominate inflation drivers
Rent prices were up 3.7% annually, the largest contributor to the CPI, accounting for 14% of the overall 2.5% rise. While this marks the first time rent inflation has dipped below 4% since 2021, the impact remains significant due to the large CPI weight.
Also contributing 14% to the annual inflation was a 12.2% jump in local authority rates and payments, which are measured annually in the September quarter but included here due to timing effects.
Construction costs rose 1.9% year-on-year, contributing 7% of the annual CPI increase.
Quarterly inflation: Education and petrol lead
The Consumers Price Index rose 0.9% in the March quarter. The largest contributors were:
- Tertiary education costs, which surged 22.6% after the government replaced the first-year fees free scheme with a final-year scheme.
- Petrol prices, which rose 4.6%, contributing 17% to the quarterly CPI rise.
“Students who have already claimed first-year fees free are ineligible to claim final-year fees free, meaning more students are paying the full study cost in 2025,” Growden said.
Fuel prices provide annual relief
Petrol prices fell 2.8% year-on-year, continuing a downward trend from a 9.2% fall in December.
In Auckland, fuel prices dropped 5.8%, largely due to the removal of the regional fuel tax on June 30.
Core inflation indicators signal cooling pressures
Economists from New Zealand’s major banks interpreted the report as a mixed bag, with underlying pressures continuing to ease.
“Annual headline lifted to 2.5% from 2.2%. While it’s a move in the wrong direction, there’s no need to panic at the monetary policy HQ,” said Kiwibank economists Mary Jo Vergara (pictured lower left) and Sabrina Delgado.
“Excluding the volatile movements in food and fuel, annual core inflation has fallen to 2.6% – the first time below 3% since March 2021,” they said.
ASB chief economist Nick Tuffley (pictured upper right) added that while some components remain sticky, notably rents and household energy, there are signs that services inflation is finally softening.
“Historically disobedient services inflation seems to be listening to RBNZ messaging–and that should make the bank happy,” Tuffley said.
Tradables vs non-tradables: Inflation’s delicate balancing act
Breaking down the CPI:
- Tradables inflation rose 0.8% quarter-on-quarter, mainly due to food and import prices.
- Non-tradables inflation—a measure of domestically driven prices—rose 1.1% quarterly, but eased annually to 4.0%, down from 4.5%.
Economists noted that tradables inflation may continue to rise due to a weaker NZD and higher global food and commodity prices, while non-tradables are likely to keep cooling.
“There are two directions to focus on–tradables going up and non-tradables going down… how those two tango over 2025 is the focus,” Tuffley said.
Rate cuts likely as inflation outlook softens
With headline inflation expected to hover near the midpoint of RBNZ’s target range, several banks forecast upcoming cuts to the official cash rate.
“We continue to expect the OCR to be cut in gradual 25bp increments, taking the OCR to 2.75% by August 2025,” Tuffley said.
Westpac’s Satish Ranchhod (pictured lower right) echoed this sentiment: “Looking at the longer-term trend in consumer prices, inflation pressures are looking well contained.”
Headline up, underlying down—no cause for alarm
While the March quarter saw a modest rise in inflation, the broader trend suggests cooling domestic price pressures and stabilising consumer costs. With both core and non-tradable inflation easing, monetary policy settings are expected to shift toward supporting recovery through the remainder of 2025.
Economists largely agree that although inflation remains slightly above the midpoint of the target band, easing domestic pressures and growing global risks could further dampen demand. This environment is paving the way for RBNZ to begin lowering interest rates, with multiple cuts forecast over the year.
“There’s enough disinflation in the data to support further rate cuts from the RBNZ,” Vergara and Delgado said.
Access the latest Stats NZ data here. For more insights, see the Westpac, Kiwibank, and ASB reports.
