Economists pick March quarter CPI to be the lull before the storm

Annual inflation is set to soften slightly in the March quarter but this is just a temporary reprieve, some economists say, with the March quarter only seeing the start of the oil crisis.

Statistics New Zealand will be releasing its Consumer Price Index (CPI) figures for the March quarter next Tuesday – the CPI is New Zealand’s official measure of inflation.

At its February Monetary Policy Statement, the Reserve Bank (RBNZ) was confident inflation would fall back to 2%, projecting the March quarter would be 2.8%. But this was before the US and Israel attacked Iran.

Since then, there’s been ongoing conflict in the Middle East which has impacted fuel supply and caused major supply disruption in the global oil market.

On April 8, the RBNZ’s Monetary Policy Committee left the Official Cash Rate (OCR) unchanged at 2.25% and also updated its projection for inflation – projecting 3.0% in the March quarter and 4.2% in the June quarter.

In the lead up to next week’s CPI release, Statistics NZ released the Selected Price Indexes (SPI) on Friday. This is a monthly series that features about 47% of the contributors to the quarterly CPI. The stand out figures from the SPI showed petrol prices going up 18.6% and diesel prices jumping 42.6% from February to March.

Following this release, ANZ and ASB announced they’re projecting 2.9% CPI for the March quarter, while Westpac has gone for 2.8%. BNZ is forecasting 3.0% while Kiwibank has made some adjustments to its forecast, projecting the annual rate will remain at 3.1% (as of the December quarter, the CPI was recording an annual rate of inflation of 3.1%).

‘A temporary reprieve’

On Friday, Kiwibank economist Alexandra Turcu said the March quarter only got to see the start of the oil crisis, so she doesn’t expect Tuesday’s numbers to show much price pressure.

“We’re expecting a chunky 0.9% over the first quarter, keeping the annual rate at 3.1%. That is significantly above our original forecast of 2.4% for the March quarter,” Turcu said.

“Demand destruction is our biggest concern. The downside risk to global and domestic growth can’t be understated here … Until the conflict in the Middle East is resolved, we will continue to see the cost of oil and oil-derived products remain elevated. And this is severely impacting industries heavily reliant on diesel.”

“The war in Iran broke out on the 28th of February, but the real impact didn’t hit our shores until mid-March, when we started to see petrol prices increase,” Turcu said. 

That means only a sixth of the first quarter was affected, which is two weeks out of 12.

“The June quarter is when the true impact will be felt.”

Westpac NZ senior economist Satish Ranchhod said while the annual inflation rate is set to soften a little in March, “this will be just a temporary reprieve”.

“Inflation is set to rise sharply through the middle part of the year in response to the recent rise in oil prices and related increase in other costs. We expect inflation will rise to around 4.3% mid-year.”

The March quarter will just be a “curtain raiser”, he said. “The middle part of the year will see the full brunt of the recent rise in oil prices, as well as related increases in travel and other costs.”

Return to RBNZ’s target band ‘looks to be off the cards until mid-2027’

ASB economists are expecting CPI to hit 2.9% and a 0.8% quarterly rise with senior economist Mark Smith saying: “The main drivers of the Q1 [first quarter] increase are higher prices for food, fuel, tobacco, and housing, with a few offsets.”

“After helping to dampen overall inflation in 2024 and early 2025, annual tradable inflation is now on its way to pushing above 3%. The Middle East conflict adds another layer of uncertainty to the New Zealand inflation profile, with a number of potential paths.”

“We expect headline inflation to spend most of 2026 around 4%. A return to the RBNZ’s target band looks to be off the cards until mid-2027,” Smith said.

BNZ head of research Stephen Toplis said rising fuel prices are already pushing headline inflation upwards but the second round impact of the oil crisis was never going to be apparent in the latest SPI data. 

“Indeed, it may take many months to show up in some sectors. The initial movement in fuel prices, however, is there for all to see.”

“Unfortunately, increases of a similar magnitude are likely to be reported in April,” Toplis said.

“This is a key driver of our expectation that the June CPI will report a 2.0% increase in prices for the quarter alone.”

He said there was nothing from the SPI data to change BNZ’s inflation forecasts. 

“We thus still believe the CPI rose 0.8% in the March quarter to be up 3.0% on year earlier levels. Also, we continue to believe headline inflation peaks at an annual 4.5% in Q2 [second quarter], 2026. We forecast headline inflation to remain outside the Reserve Bank’s target band until mid 2027 at the earliest.”

‘Watch and wait’

ANZ senior economist Miles Workman said the March quarter will “capture some initial impacts from the Middle East conflict”.

With ANZ’s projection of 2.9%, Workman said; “given developments over the past couple of months, these data have a historical feel, with inflation set to accelerate sharply in Q2”.

“Barring a significant surprise to our forecast, it is reasonable to assume that uncertainty around the medium-term inflation outlook will be the Monetary Policy Committee’s main focus in May, rather than the Q1 starting point.”

“But that’s not to say the signal on underlying inflation in the Q1 data won’t matter: continued underlying disinflation would be a welcome sight given what’s coming, whereas a stronger inflationary vibe could see the RBNZ put less weight on the fact that the starting-point output gap is negative,” Workman said.

“The data will either add to or subtract from the Committee’s comfort with the plan to watch and wait until the picture is clearer.”