The main drivers of the increase would be higher prices for fuel, airfares, household energy and accommodation, and modest increases elsewhere, ASB senior economist Mark Smith said.
Smith and ASB are picking quarterly inflation of 0.6% will lift the annual rate to 3.1% – outside the Reserve Bank’s target range.
“After helping to dampen overall inflation in 2024 and early 2025, annual tradable inflation is climbing towards 3%,” he said.
“Domestically generated inflation is slowing, with elevated costs keeping annual inflation rates above 3%.”
Economic spare capacity should work to eventually ease inflationary pressures, he said.
But as the economy improved and spare capacity in the economy reduced, there was a risk that annual inflation remained firmer than RBNZ expectations (circa 2%) through 2026, he said.
Smith notes that the risks to ASB’s forecast are to the downside with the CPI “on the cusp” of a 3% annual rate.
“We don’t envisage the RBNZ will be in a rush to change the 2.25% Official Cash Rate (OCR) and have pencilled in 50 basis points of OCR tightening from early 2027,” he said.
“However, we caution that the RBNZ may step in if the NZ economy heats up too quickly and inflation remains stuck around 3%.”
Most other economists are picking a 0.5% increase in the CPI, meaning the annual inflation rate would be unchanged from the previous quarter at 3%.
That would still be close to the upper end of the Reserve Bank’s target band, but lower underlying (or core) inflation would allow the Monetary Policy Committee to look through that in the short term, economists said.
“Stronger inflation than the November MPS forecast is likely to keep the Monetary Policy Committee cautious, but with underlying inflation still going the right way, the bar for delivering anything other than a hold in February remains high,” ANZ senior economist Miles Workman said.
Core inflation indicators were expected to remain within the 1-3% target band, he said.
Core inflation is a measure that strips out volatile or temporary price fluctuations – typically in food and energy prices.
“Under the surface, underlying inflation pressures have remained contained,” said Westpac senior economist Satish Ranchhod, who also picks a 3% annual rate.
“Measures of core inflation have trended down over the past year, with most running at levels of around 2 to 3%. That’s in part due to continued softness in housing costs.”
The main uncertainty around the forecasts was prices for discretionary household items, like apparel, furnishings and other durable items, Ranchhod said.
“While household spending has picked up in recent months, competitive pressures as retailers seek to capture their share of that increased spending could have a larger dampening impact on prices than we have assumed,” he said.
Prices for some items, like cars, could have sizeable swings – both up and down – on a quarter-to-quarter basis.
The housing components would also be worth watching, he said.
“Over the past year, the downturn in home building and related easing in construction costs was an important contributor to the easing in overall inflation. But we’re now seeing early signs of a recovery in home building, and over time we’ll likely see a lift in building cost inflation.”
Stronger headline inflation than the RBNZ had forecast was likely to keep the Monetary Policy Committee cautious, ANZ’s Workman said.
But there remained plenty of uncertainty about whether the RBNZ had done enough to deliver a sustained recovery.
“Recent data suggest the recovery has certainly got off to a strong start, but it’s early days.”
It would take a much stronger fourth quarter CPI to put a hike on the table next month, he said.
“But the risk that hikes arrive a little earlier than our forecast of February 2027 appears to be lifting.”
Liam Dann is business editor-at-large for theNZ Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined theHeraldin 2003.
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