Prices drop, easing inflation concerns
New Zealand’s inflation rate fell to 1.1% in August, the lowest it has been since 2016, as monthly prices rose slightly by 0.3%.
ASB chief economist Nick Tuffley expects this trend to continue, with CPI inflation likely to drop below 2.5% by the end of the third quarter.
Lower fuel costs and seasonal declines in airfare and accommodation prices were the main drivers behind the cooling inflation.
Food and fuel prices help bring inflation down
Food prices saw only a modest 0.2% rise in August, thanks to a larger-than-expected drop in fruit and vegetable costs, which fell by 0.8%.
Meanwhile, petrol prices dropped by 1.7%, contributing to the overall decline in inflation.
“We are also confident that conditions are in place that will deliver sub 3% CPI inflation on a sustained basis even with OCR cuts,” Tuffley said.
Rents and airfares continue to ease
Rental inflation remained steady at 4.3%, with a slight 0.3% rise in August.
As the housing market slows and net immigration decreases, ASB expects rental inflation to ease further.
Airfares also saw a significant drop, with domestic fares down 0.8% and international fares falling 2.0%. Tuffley anticipates further decreases in airfare prices as the post-COVID travel premium continues to unwind.
Outlook: Conditions favour lower inflation
ASB has revised its inflation outlook upward, expecting CPI inflation to remain below 2.5% through the end of 2024.
With the OCR still at a restrictive 5.25%, ASB predicts a further 200 basis points of OCR cuts by late 2025, with 50bps of reductions anticipated by the end of this year.
The pace and timing of these cuts will depend on economic conditions, particularly inflation and labour market trends.
Key market trends
- Accommodation: Prices increased 5.2% in August, driven by a 9% rise in international accommodation tariffs, which offset a 5.3% drop in domestic accommodation prices.
- Tobacco and alcohol: Prices remained flat, with annual inflation easing to 6.2%.
- Fuel: Petrol prices fell 1.7%, while diesel dropped 2.8%, signaling potential further declines in retail fuel prices due to falling oil prices.
Despite current inflationary pressures, ASB is optimistic that the conditions are set for sustained lower inflation, offering some relief as monetary policy begins to ease heading into 2025.
Read the ASB economic note here.
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