Inflation is poised to reach a 12-month high, driven by surging food prices and increased power costs that are straining household budgets.
For the three months leading up to June, consumer prices are projected to have climbed 0.6%, raising the annual inflation rate to 2.8%, up from 2.5% in March.
“The main drivers of quarterly inflation are expected to come from the food and housing-related groups — accelerating electricity inflation, but slowing rents and construction,” ANZ senior economist Miles Workman said.
According to ASB senior economist Mark Smith, the recent surge in inflation is likely to drive the annual rate above 3% during the September quarter. However, he expects this increase to be short-lived.
“We expect the period of three percent-plus inflation to be short-lived,” Smith said. “Forthcoming inflation expectations surveys will be critical for ascertaining whether team transitory or team persistence will win the inflation tug-o-war.”
“Our core judgement is that the deteriorating global outlook and the large margin of spare capacity will dampen the medium-term outlook for inflation.”
Meanwhile, Workman said inflation would have to be higher than forecast to stop another OCR cut in August.
“The RBNZ will need to balance any upside surprise in the CPI against the signal from the high-frequency data, which is currently pointing to a stalling recovery and therefore downside risks to the medium-term inflation outlook,” he said.
“Given this, we think it would take a sizable upside surprise in the CPI to take an August cut off the table.”
In its latest monetary policy update, the Reserve Bank of New Zealand (RBNZ) recognised the recent uptick in inflation but strongly signalled the possibility of another interest rate cut at the end of August.
“If medium-term inflation pressures continue to ease as projected, the Committee expects to lower the Official Cash Rate further,” the bank said.
Given the economic climate, Kiwibank economists argued that further interest rate reductions are needed, and they anticipate another 25 basis-point cut in August.
Meanwhile, Workman anticipated that rate cuts in August, November, and early next year would lower the cash rate to 2.5%.