Inflation Hurts. When Will It End?
The rapid deceleration in imported inflation, which helped to pull down headline, is reversing course. Were no longer importing deflation. Annual tradables inflation lifted from 0.3% to 1.2%. The 4.2% increase in food prices accounted for 28.5% of …
Kiwi inflation lifted to 2.7%yoy from 2.5%yoy over the June quarter. But context is key. A reacceleration in imported inflation is driving the move higher. It was food and electricity that continues to bite at our back pockets. Domestic price pressures are cooling.
This is the first test for an August cash rate cut. Inflation will likely push further from here. But more important to policy is underlying inflation, which remains within the RBNZ's target band. Spare capacity within the Kiwi economy is keeping downward pressure on domestically generated inflation.
Downside risks to medium-term inflation remain. Whether that's a consequence of a slowdown in global economic growth, or a diversion of trade marked at a discount. There is still a case for more accommodative interest rate settings.
Kiwi inflation accelerated over the June quarter. Annual headline rose to 2.7% from 2.5%. It's a move in the wrong direction. But context is key. A strengthening in imported inflation is driving headline higher. But domestic price pressures, on balance, continue to cool. And most importantly, the underlying trend in consumer prices is weak. Excluding the volatile movements in food and fuel, annual core inflation lifted to 2.7% from 2.6%. A move that was better than many had feared, and one that will improve into next year. For now, there's little risk this bout of high inflation will persist. Especially given that there's still significant spare capacity in the Kiwi economy.
Today's report showed that price increases are becoming less extreme. The proportion of goods and services that increased in price was little changed at 54%. However, the June quarter saw a greater share of the basket record a decline in price, from 30% (185 items) to 35% (210 items). A larger proportion of items either remained flat or increased in price by less than 3 percent in the 12 months to June 2025.
The rapid deceleration in imported inflation, which helped to pull down headline, is reversing course. We're no longer importing deflation. Annual tradables inflation lifted from 0.3% to 1.2%. The 4.2% increase in food prices accounted for 28.5% of the lift in headline inflation.
Domestic inflation, in contrast, continues its (slow) move south. Annual non-tradables inflation pierced below 4% for the first time in four years to 3.7%. Domestic inflation has fallen some way from its 6.8% peak in 2023, but it is still sitting high above the long-term average (~3%). And that's despite such a weak domestic economy. Such persistence is due to the lingering strength in administered prices. Council rates and insurance costs are running well above historic averages, up 12.2%yoy and 6%yoy, respectively. And households are now contending with high electricity charges, climbing to 9.1%yoy. If we exclude housing-related inflation, domestic inflation prints at 3.5% – the lowest since December 2021. Given excess capacity still sloshing in the economy, domestic inflation should continue to head lower. But the pace of easing is being dictated by factors largely outside of the RBNZ's control. That's a frustration.
Inflation will likely push higher in the coming quarter. But like any spike, it will come back down. The economic undercurrents are weak. For monetary policy, the underlying trend in inflation is what matters most. Monetary policy settings today, are set for an economy 12-to-24 months down the track. It takes a long time for movements in the cash rate, and other lending rates, to influence the economy. So, a knee-jerk reaction to a couple of internationally charged price shocks is not on the cards.
The RBNZ's job is to look through volatile movements, and set policy for late next year. And in late 2026, inflation is set to slow below the mid-point of the target band (2%). It's why we focus more on core. Core measures of inflation strip out the volatile price movements. Encouragingly, core inflation has been trending south since hitting the 6.7% peak at the end of 2022. At 2.7% (in the year to June 2025), core inflation remains within the RBNZ's target band. Our forecast stirps out the spikes and looks at slack in the economy. And there's a lot of slack, especially in the labour market. Our best guess, incorporating the damage inflicted through the recession we're still crawling out of, has inflation falling to 1.8% next year. If realised, the RBNZ continues to overcook. And we continue to advocate a stimulatory setting of 2.5%.
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Scoop
7 hours ago
- Scoop
Kiwis Fleecing Kiwis: Why The Foodstuffs Model Is Failing
Pak'N'Save Richmond workers are calling out their "Kiwi owned and operated" bosses after a 6-month bargaining ordeal for attempting to drive down average supermarket wages, undermining union rights, and giving loyal staff a raw deal, all the while pocketing healthy profits for themselves. Bargaining with the store's owners, Glenn and Tracey Anderson, has dragged on since January 2025 with no meaningful progress, according to Ross Lampert, Workers First National Organiser (Retail Food). Mr Lampert said that the company refuses to offer industry-standard basics like a staff discount or long service leave, and their latest pay offer after six months of bargaining falls well below inflation, meaning a real-terms pay cut for workers who are already struggling with the cost of living. "This is exactly what happens when the Foodstuffs model lets individual owners race each other to the bottom - it's Kiwis fleecing other Kiwis," said Mr Lampert. "They proudly talk about 'investing in the team' while they chip away at pay, undermine union rights, and break the law to keep wages low." Pak'N'Save Richmond has a long history of anti-union behaviour, Mr Lampert said. Workers have been offered higher wages to sign Individual Employment Agreements instead of the union-negotiated Collective, which is a clear breach of employment law. The union holds documented evidence, including payslips showing two different rates offered for the same role at the same time, with the only difference being union membership. One worker at the store, commenting anonymously due to restrictions on public speech contained in company policy, said: "Customers are always shocked we don't even get a staff discount, let alone a living wage." Another store worker said: "Management tries to scare people away from the union and bully staff into signing individual deals. It's a scam." The company has also attempted to restrict access for union organisers by actively trying to block Mr Lampert's ability to go into certain areas, behaving aggressively and hiding workers from having fair representation. This intimidation has left many staff afraid to speak up, but Workers First members say they are ready to stand strong together and take further action if needed. "This is why Fair Pay Agreements were so important," said Mr Lampert. "They were designed to stop exactly this kind of race to the bottom, but our current Government scrapped them, leaving workers exposed to shoddy operators like these who are determined to keep supermarket workers teetering on the edge of poverty." "Even the Australian chains like Woolworths treat Kiwi workers better than these 'proudly Kiwi' owners." "Kiwi shoppers deserve to know that the people stacking their shelves and serving them every day are being paid fairly and treated with respect. Right now, that's not happening at Pak'nSave Richmond." Background information Workers First Union holds documented evidence of unlawful pay preference as described above - it is available to media on request. Bargaining between Workers First and Pak'N'Save Richmond was initiated on 30 January 2025. The company is currently in the process of expanding the physical footprint of the Pak'N'Save Richmond store into Richmond mall, prompting the displacement of at least 14 other retail stores.
National Business Review
8 hours ago
- National Business Review
Big business coping better than small in current economy
Larger New Zealand firms are hanging on better than smaller businesses in the current economic environment, with cost and inflation pressures still weighing heavily. Kiwibank has today released its latest State of Savings Index, which included responses from consumers and businesses across the
1News
9 hours ago
- 1News
Kiwibank greenlit to raise $500m capital to challenge big four banks
Kiwibank has been given the green light to raise up to $500 million in new capital, a move the Government says will help the New Zealand-owned bank better compete with the big four Australian-owned banks. Finance Minister Nicola Willis announced on Wednesday that, following a market-testing process, Cabinet had approved Kiwibank's parent company to raise up to $500 million of capital to fund the bank's growth. "Allowing Kiwibank to raise up to an additional $500 million is the first step towards giving Kiwibank access to the capital it needs to truly compete with the big four Aussie banks while retaining its intrinsic New Zealand identity." A Commerce Commission report released in August last year found the banking sector was "uncompetitive' and that the four big Australian-owned banks made high profits while Reserve Bank rules made it hard for smaller banks to challenge. Several recommendations were made, including to increase Kiwibank's capital funding. ADVERTISEMENT Willis said advice to the Government was that an additional $500 million of capital could support up to $4 billion of business lending or $10 billion in home lending. "To assess interest in Kiwibank, Kiwi Group Capital (KGC) engaged with New Zealand KiwiSaver funds, investment institutions and professional investor groups including Māori institutions." They advised her there was "sufficient interest" from professional New Zealand investors groups to proceed. While the capital raise is not a state asset sale—no Crown shares will be sold and all funds raised will go toward Kiwibank's future growth—Willis said a future government may consider a public listing of the bank but that this would not happen without an electoral mandate. The Government had also approved measures to safeguard the bank's New Zealand identity. These include: Maintaining at least 51% government ownership of KGC for the foreseeable future. Requiring a majority of KGC's directors to be normally resident in New Zealand. Ensuring Kiwibank retains its current name and principal place of business in New Zealand. Limiting any future foreign investors to a maximum of 20% ownership. Keeping Kiwibank's head office in New Zealand. ADVERTISEMENT KGC had until June 30, 2026 to complete a capital raise which would be subject to final approval of terms and conditions from shareholding Ministers. Kiwibank. (Source: Supplied) KGC chairperson David McLean said the Government had reaffirmed its commitment to supporting Kiwibank as a competitive, New Zealand-owned alternative to the large banks. "The capital raise process aims to provide Kiwibank with capital to continue its above market growth and enhance its competitive position while ensuring all funds raised are invested into New Zealand's future. There will be no return of capital to the Crown, and no changes for Kiwibank customers." Kiwibank chief executive Steve Jurkovich said the bank existed to challenge the status quo and disrupt the banking sector for the benefit of New Zealanders. "Delivering on our purpose of 'Kiwi making Kiwi better off' is what differentiates Kiwibank and drives our performance, and that is what we continue to be focused on. Any capital raise would be structured to ensure Kiwibank's continued role to improve services and pricing for consumers."
