But there is widespread agreement that this will represent a peak in this latest cycle of inflation, allowing the Reserve Bank to look through the breach and cut the Official Cash Rate again in November.
In a note headlined “down from here”, ASB senior economist Mark Smith says he expects the “period of circa 3% annual CPI inflation to be short-lived”.
The large margin of spare capacity, softer domestic backdrop and fickle global scene would result in annual CPI inflation approaching 2% from next year, he said.
But despite being down from its post-Covid peak, the cost of living remained problematic for the economic recovery, he said.
“In our view, this is the largest single headwind facing the household sector,” he said.
“We have seen a cumulative increase in household costs of around 25% since the end of 2019. Increases are somewhat larger for key necessities like food and housing. Little wonder households feel under the pump.”
There were promising signs that food price inflation, which has been elevated in the past year, has now peaked.
The monthly Stats NZ Selected Price Index – which covers food, travel and accommodation costs (about 46% of the total CPI) was released last Thursday.
It showed food prices were down 0.4% for the month of September, taking the annual rate of food price rises to 4.1% – from 5% in the year to June.
“Broadly speaking, selected prices for September supported our view that annual CPI peaked [in the third quarter] and will ease [in the fourth quarter],” said BNZ head of research Stephen Toplis.
September’s monthly prices were slightly softer than expected, he said.
“It provides early evidence that the current bout of inflation is slowly starting to unwind. This should help ease some concerns around inflation persistence.”
September saw the first fall in food prices since February, he said.
“We have been of the view that annual food price inflation will follow easing commodity price inflation,” he said.
“There are signs now that the unwinding in commodity prices over recent months is starting to feed through to domestic retail food prices.”
Expectations were for a slightly higher rate of inflation than the RBNZ forecast in its August Monetary Policy Statement, said Westpac senior economist Satish Ranchhod.
“Our forecast for a 1% quarterly rise in consumer prices is a little above the RBNZ’s last published forecast for a 0.9% increase. However, we have the same forecast for annual inflation [3%],” he said.
Regardless, the RBNZ would likely look through the peak, with more stable core inflation providing some comfort.
“With much of the current rise in inflation driven by increases in a few specific areas, the RBNZ will be paying close attention to the various measures of core inflation,” he said.
Core inflation measures smooth through the quarter-to-quarter volatility in inflation and instead track the underlying trend in prices.
The RBNZ wouldn’t be pleased if headline inflation breached the top of its 1-3% target band, said ANZ’s Workman.
“However, it will take comfort from the fact that the recent acceleration has been driven by the more volatile side of the CPI basket [meaning payback is likely down the track].”
Broader economic conditions remained consistent with ongoing underlying disinflation, he said.
“Indeed, given the recent loss of economic momentum, we think it would take a material upside surprise in the stickier parts of the CPI for the RBNZ to reconsider the weight it has been placing on downside medium-term inflation risks.”
With few economic tailwinds on the horizon, more monetary policy support was needed to get the economy moving, said ASB’s Smith.
“We expect a 25bp OCR cut in November, with the clear risk the OCR troughs below 2.25%.”
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
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