Consumer price index preview: Banks predict annual inflation to fall but warn New Zealand not out of woods

New Zealand's September quarter consumer price index (CPI) data will be unveiled on Tuesday morning, and major banks are expecting annual inflation to finally fall.

Statistics NZ's CPI, which tracks annual price inflation, hit a whopping 7.3 percent in the June 2022 quarter. 

But after months of steady increases, ASB expects annual inflation to finally fall in Tuesday's data. 

"We expect a 1.5 percent quarterly increase in Q3 headline CPI, with annual inflation falling to 6.5 percent," senior economist Mark Smith said in ASB's preview report.

Smith went on to say while the future is still highly uncertain, the inflation outlook is looking "considerably less dire than it did a few months ago". 

But Smith said core inflation is expected to stay high for some time which will continue putting pressure on the Reserve Bank of New Zealand. 

The RBNZ has been steadily increasing New Zealand's Official Cash Rate (OCR) since October 2021 in an attempt to dampen demand, something Smith expects will continue. 

"Inflation remains much too high for the RBNZ’s comfort and increasingly restrictive OCR settings are required," he wrote. 

"Annual CPI inflation is expected to ease from 30-year highs, driven by slowing increases in tradable prices. Despite the lower NZD, lower global energy prices and sharply lower shipping costs hold out the prospect of further falls in imported inflation. 

"Our expectation is the housing group inflation is close to peaking if it has not done so already. Still, the RBNZ has its work cut out for it. Inflation may have already peaked, but it remains much too high for the RBNZ’s comfort. Core inflation rates are expected to remain sticky at close to (or at) multi-decade highs in Q3, and price rises widespread."

Smith said there is concern inflation will remain entrenched at levels outside the 1 to 3 percent target. 

"The eventual return of inflation to the 1-3 percent inflation target band is still not assured, so the RBNZ is likely to err in favour of doing too much (rather than too little) on OCR settings."

Smith said as a result the RBNZ is likely to hike the OCR by 50 basis points again in November before another 25 basis point hike in February. 

ASB expects the OCR, which is currently 3.5 percent, to peak at 4.25 percent early next year. 

ANZ is predicting a similar drop in Tuesday's inflation figures. In a report published last Friday, the bank revealed it expects inflation to ease to 6.6 percent. 

The report said the main driver of lower annual inflation is expected to be a roughly 8 percent fall in the retail price of petrol over the quarter.

But ANZ warned while lower inflation will be a relief for under-pressure households, New Zealand is far from out of the woods yet.

"While any easing in inflation pressure will offer some relief to squeezed households, the likely absence of a more broad-based decline in domestic inflation pressures means the RBNZ probably won’t take much comfort…" the report said. 

"We anticipate that annual non-tradables inflation remained strong at 6.3 percent… driven by rising rents, domestic food costs, construction costs, and a host of other domestically determined prices.

"Core inflation measures will likely remain far too high as well (even if they ease slightly from current highs)."

ANZ said it expects headline inflation to fall as petrol prices come down but core domestic inflation is expected to remain "far too strong". 

Infometrics forecasts inflation will remain above 6 percent for the rest of the year - well above the target range. 

Expert says inflation has peaked 

The banks' predictions are in line with Milford Asset Management portfolio manager Will Curtayne who told AM last month it appeared inflation had peaked during the June quarter. 

But Curtayne said it doesn't mean inflation is expected to drop quickly - which will mean prices will stay high for some time.

"What we've seen in the last 10 years is we've got a few structural drivers of inflation returning to a world which hasn't seen them in a while; the first one is the great productive workforce of baby boomers is reaching retirement age.

"The second big reason we think inflation may remain higher is a world that has been globalising in outsourcing production of goods to… China and other countries is starting to see that trend slowing and maybe even reversed. The conflicts with Russia and Ukraine have made countries much more aware of where they manufacture and import their goods," he told AM in September. 

Curtayne said the world's economy was also being hampered by tightness in the labour market.

"The whole Western world is a similar demographic to New Zealand and Australia that's starting to see those baby boomers retire and, in the developing world, we've benefited immensely over the last three decades from nearly half a billion people in China entering cities and joining that global workforce effectively and that impulse is beginning to slow," he said. 

"It does mean, while the rate of inflation probably will moderate from these really high levels we're seeing today, it will probably remain a bit higher than what we saw over the last decade."

Curtayne said the economy could experience a "grind of higher prices" for up to a decade which could mean higher interest rates for longer.

"[Higher interest rates] may keep sending house prices a little bit lower in the near-term and mean they don't recover as quickly as we might hope after that downturn," he said. 

"The good news, of course, is if labour supply is constrained that means… good bargaining for higher wages. We do think you'll see higher income growth for workers and if you have slightly lower house prices and higher wages, it's great for first-home buyers and those people who want to save up for that deposit to buy a house.

"We do think you'll see incremental Government support for areas that really need it and that is happening globally as well," he added.