The Consumers Price Index increased just 0.5% in the December quarter, bringing the annual inflation rate to its lowest level in over two years.
Statistics New Zealand says annual inflation fell to 4.7% from 5.6% during the three-month period, dropping to its lowest level since June 2021.
Prices began to climb, that same quarter, during the Covid pandemic and peaked one year later at 7.3%. The Reserve Bank (RBNZ) responded by lifting interest rates from 0.25% to 5.50% by May 2023.
Inflation has been steadily falling since as consumer demand has softened, more workers have entered the labour market, and pandemic supply disruptions have been resolved.
The RBNZ forecast the headline inflation rate would be 5% in the year ended December, while most bank economists expected it to be 4.7%.
Annual tradable inflation, which includes imported goods such as petrol, dropped to 3% from 4.7% while non-tradable inflation fell to 5.9% from 6.3%, meaning it came in higher than the RBNZ's 5.7% prediction.
Nicola Growden, a senior manager at Stats NZ, said housing costs were the largest contributor to the annual inflation rate.
Rent prices increased 4.5% in the year ended December, while construction and rates were up 3.6% and 9.8% respectively.
The next the largest contributor to the annual headline figure were food prices, with ready-to-eat food up 7.3% and snacks increasing 9.7% during the year.
However, food prices actually fell 1.2% during the last three months of 2023 and helped to offset another 0.8% increase in housing costs.
“Prices for about one-third of all items in the CPI basket decreased in the December 2023 quarter, the most in over three years,” Growden said.
The decline in the food category was driven by lower prices for summer vegetables, she said.
Stats NZ collects its own core inflation measure, called trimmed-mean measures, which ranged from 5% to 4.9% during 2023 and between 0.6% and 0.7 in the December quarter.
“This indicates that underlying inflation is higher than the 4.7% increase in the CPI,” it said.
The central bank has become more focused on core and non-tradable inflation, which is less volatile and more indicative of domestic inflation pressure, in recent months.
It forecast tradable and non-tradable inflation would at 4% and 5.7% this quarter, respectively, versus the actual prints of 3% and 5.9%.
In note written prior to the data release, Westpac economists said the Reserve Bank had been “frustrated” by sticky core inflation and migration adding pressure to housing costs.
“The new government only increased the pressure on the RBNZ to perform in their core role when they refocused the RBNZ’s mandate to a sole focus on inflation control in December”.
New Zealand’s financial markets are priced for interest rate cuts to begin in the middle of this year, while the central bank itself plans to hold at 5.50% until 2025.
161 Comments
The trick will be trying to keep it there. The big upside risks of energy and trade disruptions, war. The downside risks of tanking demand and economic contraction.
My pick is that there will be less NZD available in 6 months than there is today. If that's coupled with another energy spike, we're in for a fairly significant drop in living standards. That's not all bad news, at some point NZ will need to stop living beyond its means.
LOL. You can't base holding the OCR high using black swan events.
This 'just in case' nonsense is absurd.
i.e.
'upside risks of energy and trade disruptions, war'? - Unlikely to extremely unlikely.
'downside risks of tanking demand and economic contraction'? - Virtually guaranteed with an OCR held at 5.5% for too long.
The risk is the war escalates, trade is affected, energy prices soar again. This is an inflation risk, I said nothing about the OCR even though that's the only way they really try anything.
You can't base holding the OCR high using black swan events.
This is exactly where we are right now. Attempted reversal of absurd policy as a result of a black swan event.
I think you correctly predict the trend which has more downside than upside so the timing and extent of the change will be critical, my pick is the downside is weighted in favour the timing likely longer than expected and the effect will be more stressful than a stay in ICU with a 50/50 terminal illness.
Many non seasonal foods have increased a lot recently. But there have also been dramatic drops in packaging sizes leading to shrinkflation. For example I looked at getting some Roses ginger marmalade and not only had it increased on price, but the jar was noticeably smaller. I didn't buy it because it was now so small. Bags of chips used to commonly be 200-220gm, are now 140-150gms, and the price also increased. Not much comment about shrinkflation and how they account for this in their figures.
Forget the packaging. The reliable measure is $$ per kg or $$ per 100g.
It's usually there in small print.
If it's not there I don't buy as I can't be bothered pulling out my phone's calculator, or tiring myself out with simple maths. If the supermarket wants to sell me stuff, they need to show me some respect and make the pricing obvious. No price = no sale.
Under the current MPC Remit (see more detail in related pages below) the Reserve Bank is required to keep annual increases in the CPI between 1 and 3 percent on average over the medium term, with a focus on keeping future average inflation near the 2 percent target midpoint.
No mention about tradeable vs non-tradeable...
If you look at the period from 2000-2019 you get:
Tradeable Median: 0.15% q/q
Non-tradeable Median: 0.75% q/q
The latest figures would be around 30th and 75th percentile respectively, so a little higher/lower than typical, but not excessively so. For the combined figure the median is 0.5% q/q, which means that overall this quarter's results don't look meaningfully different to the typical quarter over the last twenty years, at least from this crude high-level view. It's just one quarter though.
Yes govt local services are indeed an issue . Elderly neighbour, widowed some time ago, asked the council whether it was true rates in Christchurch were to rise by over 15%. As to be expected got no confirmation but it was suggested if she had a problem, go get a reverse mortgage. From that could you therefore sense that the high rise in house prices across New Zealand, in the last four years or so, has now become a target area for the council to tap into?
No idea when it came in, but I remember seeing it on my rates bill: https://www.govt.nz/browse/housing-and-property/getting-help-with-housi…
Well if the Mayor gets his wish and Christchurch should host the 2030 Commonwealth Games, yes those very same pointless games Melbourne couldn’t afford, then expect the impact of that on rates, will see the Heartland Bank getting a heck of a lot more applicants for those.
Yes, it's slightly annoying that many begrudge the few tens of millions spent on the cycling infrastructure I and thousands of others use every day to travel in safety, while we are asked to shoulder the burden for hundreds of millions spent on a stadium I may never set foot in.
It won't be sporting that will fund it, it will be events like in Dunedin. Theirs paid off in 5 years, and to think people literally chained themselves to the entrance when the construction was being carried out it try and stop it. Give it a few more decent artists come for concerts at the new stadium and Christchurch will become much more of a popular place to live.
Are you certain that the Forsyth Barr Stadium was paid off in 5 years?
From what I understand it has been an ongoing drain on ratepayers' wallets and on other council business balance sheets..
The danger of stadium costs, a Dunedin study (newsroom.co.nz)
Regarding reverse mortgages, something feels really wrong about them.
I believe that the interest rate that applies to them is higher than a straight out mortgage. Why is that?
For large numbers of old people (most of whom will have children), who paid off their mortgage a long time ago to give themselves peace of mind, this idea is obnoxious.
The only justification in my book would be if said children are reasonably well off and if some money was needed for something really important like to get some private surgery vs being on the ever lengthening waiting list with the public hospitals.
Reasoning seems clear to me - if you are elderly and believe your kids are capable of standing on their own two feet, your equity is yours to do as you please. Why not take out 10-20% of that, stay in the home you love, and do some things you love as well?
The limits are quite low - I believe Heartland have a limit of 30% of the house price but this could have changed.
The reason for higher interest rates is partly higher risk - you don't know when the money is coming back, it will all come in as one lump meaning you are paying borrowing/equity costs while waiting for eventual repayment, an exceptionally long life could mean the amount owed is unrecoverable, and there is lower competition in the market at this point.
All of society has been burning through future resources, including our financial/monetary systems who have been heaping more and more debt on future generations to pay for things now. So it simply follows this trend, but relies on future sale of property. Nothing wrong with it unless you think we should also stop burning fossil fuels etc now, saving them for future children and act/vote accordingly and accept the loss of living standards as a result.
If your book is new and increasing, sure, limited cashflow. Later, if the bank is not in growth mode any more or winding things down, good cashflow....
But I can see that if there was another big EQ or something like that, forced sales like these would not work. Then again normal mortgages would not be paid under these conditions either.
Agreed. If one cannot afford to live where they live then they must take appropriate action. Cruel as some may see it, It isn't the council or the govt's responsibility to keep someone in their own house if they cannot afford to pay for the services they use via rates.
The big drivers of that were rates and rent. We keep importing more people, landlords try and pass on their high interest costs, councils are paying interest on their debts as well as having to pay for decades of infrastructure neglect. How is keeping the OCR high going to fix any of that?
This line is often trotted out and it's simply not true. Every rent raise risks tenants moving out, resulting in a vacant period. Many landlords, myself included, would prefer not to raise rents but when you combine high market demand with high interest costs it swings the pendulum in favour of meeting the market. If interest costs were lower, there's less motivation for landlords to increase rents. It's not the only factor but it is a significant one.
If you were correct, then periods of high interest rates would correlate with higher rents, and low interest rates would correlate with lower rents. However, if you look at the actual numbers, rents are unrelated to interest rates. See for an example the Corelogic Housing Affordability Report: https://www.corelogic.co.nz/news-research/reports/housing-affordability… rents remain stable as a percentage of household income, and when compared with interest rates there is no correlation.
This is not actually that far fetched. When inflation is concentrated in a highly leveraged sector like housing, lowering the OCR can REDUCE inflation, if only in the short term. I seem to remember this was the Reserve Bank of Ireland's play around 2006-07. I'm not sure how it worked out for them.
Lower Much Faster 🍿
- 1% lower than RBNZ forecast on annualised tradable
- Decrease in government spending which will have a direct impact on non-tradable forecasts at next MPS
- Tradable too impacted by housing costs as a result of higher OCR.
we will get a new ocr track come next month and they will cut the month after that.
it has begun
They do have a recent history of too little too late 2020. Granted they have at least taken some culpability on the rampant inflation that eventuated in part by their actions, and other delayed actions, I'd be of the same mind that they'll be on the cautious approach.
LOL.
It is already tightly controlled!
As soon as it starts trending down there is ample evidence of it being 'controlled'. (How much of it was related RBNZ action is another debate entirely.)
It has been trending down for a year! More than enough evidence!
There is nothing to be gained by strangling the economy any further.
Inflation, once trending down, will continue for another 4 to 6 quarters at least (albeit the post Christmas period is likely to show a blip but the trend will reestablish itself after that.)
Only if you believe the tradables vs. non-tradables split is defined correctly and measured correctly. I don't.
Even BNZ's Topliss is questioning the split. And he's far from alone among economists. (He is however alone in being the first bank economist to publicly state it IIRC.)
Yes, but if they (RBNZ) are measuring that split incorrectly, then they'll continue measuring it incorrectly, I assume.
And I think they likelihood of non-tradable continuing their upward trend is high - and I don't see those increases being off-set by tradable decreases.
The non-tradeable rate can lag the tradeable rate.
Or put another way, tradeable rates are more often captured as finished goods & services or raw materials, whereas non-tradeable rates are more likely to be 'derived' or 'warehoused', or loaded into the future pricing, which takes up a bit time.
Sorry, not a great description, nor applicable in all circumstances, as this whole differentiation is riddled with inconsistencies.
"Nicola Growden, a senior manager at Stats NZ, said housing costs were the largest contributor to the annual inflation rate. Rent prices increased 4.5% in the year ended December, while construction and rates were up 3.6% and 9.8% respectively."
Remind me how keeping the OCR high is meant to reduce the cost of Rent and Rates again?
I think it was Bernard Hickey when at interest.co who referred to unrealised capital gains as the ATM on the house.
And, you're not wrong, it's a very significant "economic growth" driver. Note I used those inverted quotes deliberately - all the spending using the house ATM does is add to GDP - has a negative effective on productivity.
Well, that's if I understood ECON 101 correctly!
It's better covered in ECON 100. 'Spending' needs to be divided into 'consumption' and 'investment'. Investment, using the economics definition and not the common and perverted definition, is good as it can increase productivity. Consumption, in and of itself, is neither good nor bad in itself, just necessary. (It is a shame that consumption 'prices' do not include all costs, e.g. societal, environmental, etc. If they were, we'd be consuming quite differently.)
Have you received quotes recently that you can compare to the same work from a year, or two years, ago?
I have. I'd say construction inflation is near zero for my projects.
Builders are sharpening their pencils to ensure work streams this year and next (and they're expecting further falls in some products and in subby rates too.)
It's pretty much across the full range of products and services from the detail I have available to me. The days of suppliers simply throwing out a number and it being accepted are long gone. Now, each line item is scrutinized and questioned. You'd laugh at some of justifications given for higher prices, e.g. "high fuel prices', yes, even now. Or, "there will be war in the M.E. and fuel prices will skyrocket".
Councils are becoming one of the biggest issues in NZ, and one of the biggest contributors to inflation.
The whole model must be changed, and it is time that sanity in financial management of council budgets is introduced. It is high tIme to significantly reduce wasteful spending, and to cut human and financial resources in areas that are not high priority.
I did some work for Auckland and Wellington councils in the past, and I personally witnessed an eye-watering amount of projects with no or very questionable return to the community. wasteful spending and a culture of utter contempt for ratepayer's money, wildly overpriced third-party contracts, all combined with way too many pen-pushers, communication consultants, middle management layers and bureaucrats with ill-defined functions and virtually zero accountability and no measurable results. It is just a b....y mess.
Things cannot continue like they are now in local government. I have no easy answers to the issue, but strict regulations and controls of councils by specific legislation might be a start.
Pretty well sums up New Plymouth Council. New CEO appointed last year is likely to trim some fat off.
Vanity/nice to have projects still up there. They have allowed capex for infrastructure (the 3Ws). My NPDC rates (excl TRC) increased 19% overall with the general rate residential increase of 31% (land value based). The land valuation system is broken and the Local Govt (Rating) Act needs to be changed. Anyone wanting a land value tax be careful what you wish for under the current valuation method.
Interesting, as a LVT is intended to make productuve use of land and overall reduce the land value. What would councils would do if this occurred on a larger scale due to the loss in rates? I'd like to think they would have to lay off staff in wasteful pointless roles and be more efficient and selective with projects, but then again there's the real possibility they would do everything within their power to keep the land values high.
I understand LVT is a central govt tax collection and that local rates will still be levied for the various services. Councils can adjust the rates cents per $ land value (or land and improvements value) and so arrive at an amount to run the council and all the projects and maintenance required. It does not matter overall whether the land value goes up or down, they adjust the cents per dollar value to arrive at the amount needed for their budget.
I wondered why I didn't notice the inflation in food as much as others seem to. We don't buy ready to eat meals or snacks. I buy ingredients, fresh if I can get them, and I only buy 2-3 meals ahead so I don't throw food out at the end of a week or fortnight.
When something is heavily discounted, I buy a lot and freeze it. Pak N Save had a special once where sausages were on brand promo, $3.50 instead of $10 for a pack of 6. I don't eat them often but good for a lazy casserole or BBQ. Bought 10 packs and that did us for a few months. Last night's dinner was pesto out of the freezer, $3 of mushrooms and bacon tossed through some pasta. Total cost for 4 of us about $6 considering what went into the pesto originally.
December quarter 0.5%
Trending down for over a year.
A quarter at 0.5% is about 2.015% on an annual basis.
Next quarter should be about the same as this December's quarter or slightly above. The quarter after that it will be below this quarter.
The RBNZ has absolutely no grounds for holding the OCR at the current level. They will spin whatever nonsense they can to justify holding it at 5.5% but none of it will be anything but spin.
If the RBNZ doesn't cut in their next announcement they are overshooting. Plain and simple. (But great news if you want the NACTF to be a single term government.)
I don't understand why people keep saying that. I've never found a valid reason, nor anyone with any cred that will stand behind it and justify it. FX traders love to use it but the effect is marginal. So long as people expect the Fed to cut soon - which they do - NZ can cut early with few if any consequences.
Can to enlighten me as to why you believe this?
They don't need revenue from other sources. Just raise rates. That's what they're there for. We have debt to spread the burden, and they've been doing that. They just need to add in the rates component to have us present landowners contributing our fair share rather than trying to leave it all for following generations.
Rates helping to drive 'inflation'? I don't buy that.
Rates are a tax.
Have other tax increases been a reason to suffocate the economy?
No they have not!
The RBNZ has - in the short term - looked through them for the most part.
In the medium term they could (but not will) result in wage increases (and then price increases and then inflation).
But, if the RBNZ holds the OCR for another quarter or two, we'll be in recession, and nobody will be getting wage increases, ergo they'll be no inflationary push.
There should be a rates revolt in many districts. Rates are supposed to include maintenance and forward planning for upgrades population growth, repairs, etc. Granted some repairs may be unexpected and in some cases populations will increase faster than planned, you have still paid for future work to be done to keep the system functional and adequate to the local populations needs. They then come to you for sometimes outlandish increases claiming they need to upgrade infrastructure, when the local population have already paid for these upgrades. Why then should the local population be funding necessary upgrades when they have already paid for it, and the councils have deferred that portion of funding elsewhere to pet projects to make places look nice and to make themselves appear to be doing something positive.
We haven't paid enough and because of that we now have to pay even more. What's happened is going and getting your car serviced but only paying half the cost. The mechanic just cuts corners and doesn't change your oil or fix up any minor issues. Then everything fails at once and you have to pay a massive amount. Rates have been held below what they should have been by greedy old people who vote for local politicians who promise to hold rates down and then cut essential but non-apparent services.
Fair assertion and I agree on the consistent voting to keep rate hikes down, however rate hikes will increase dependent on the state of the assets and infrastructure by territory, e.g Wellington having not maintained their water infrastructure vs many other regions which have done far better at this over time. Catch 22 is that said people who voted to keep rates down will be in catchup mode moving forward, and many may no longer have any income.
The RBNZ were way behind the curve on the way up. They will be marginally better on the way down. Still too slow, but put your feet in their shoes. Better too slow with a mild recession than cutting too soon and having to go back to rises because they cut too soon. Hence, they will cut too late. They are institutionalised; quite literally.
Seriously? You think NZ's economy is the same as Turkey's? Oh. I get it. That was a joke.
NZ's economy was in recession just a while back and is probably in one now, and between we had sub-par growth. And on a per capita basis growth has been negative or zero throughout. And you want more when inflation has been trending down for over a year? (SMH!)
Countries like Turkey appease their voters and take the risk of spiralling inflation. We have a proper independent reserve bank that only needs to worry about inflation, and we have that for a very good reason. The RBNZ does not need to care about recession, it only needs to lower rates if it thinks there is a risk of deflation. If inflation stabilises at 2% it shouldn't reduce rates at all, the current OCR would become the new normal.
They shouldn't try and avoid all recessions for financial stability. But if they can avoid a recession without causing inflation then why not.
The only way to avoid this recession would be to cut rates (probably quite considerably). That could cause spiralling inflation. Probably wont, but could.
So that’s why it should be ‘wait and see’.
Ie. If we get to May and the recession is a mild one with little if any effect on financial stability, and annual inflation is say circa 4%, then they should hold. However, if the economy is really tanking and there is threat to financial stability, then there may be a good case to cut.
Yes agree. Even though a few months ago I said they should cut, now I have changed my tune.
But it is fairly likely that if they don't cut ASAP they will be "too late to leave the party". I think that is the least regret risk, I bet Turkey wish they had stayed at the party a little longer.
re ... "The only way to avoid this recession would be to cut rates (probably quite considerably). That could cause spiralling inflation. Probably wont, but could. ".
Sighs of relief do not cause spiraling inflation. Never have. Never will.
The RBNZ can cut 0.5% in February and the only effect will be slightly louder sighs of relief. (Especially amongst NACTF supporters are they may get another term.)
Enjoy the low reading while you can. Our imported inflation gets a kick up from the increase in supply chain costs this year, 126% YTD, and the intentions of shipping companies to keep it elevated (See Shanghai Containerized Freight Index and www.container-news.com). This means 5c on your can of veggies from Thailand; 10 -15c on your bag of frozen food from Europe or China.(We seem to not process those anymore in NZ)
Domestic is also not looking good with an even bigger increase in District- and Regional Council rates than 2023. (Anything between 7.5% and 13.5% with some outliers well above 20%). Result is 300 - 500 $ more a year! Insurance premiums for everything up between 5% and 14% compared with 2023, an additional 300 - 500$!
And then...we have still the greedflation effects from our Duopoly and being and import fuel terminal only.
Supermarket food prices have gone up in January. A visit to my dental hygienist last week now costs $209 instead of $167 it was this time last year. If anyone thinks domestic inflation is on the way down has rocks in their head. And how long can imported inflation numbers keep pulling the inflation rate down? At this point, it would have to go negative to get back to 2% with domestic inflation still running close to 6%
The current Consumer Price Index (CPI) calculation methodology in the US is bogus.
It will be bogus here as well. Just in different ways.
Going back to the 1980 or 1990 CPI calculation methodology, the actual rate of US inflation is around +10% vs. the +3% rate you read about in MSM or hear about at the water cooler.
Big difference.
The non tradeable like Rates local and Regional, Insurance for home, ACC and the like are all controlled by govt either local or central you can not pay them you can't escape from them. Not like going out for dinner if you don't have the money you don't eat out. So saying that the RB should not take those services provided by the govt as inflationary.
Its not surprising that access to politicians and the ability to influence regulation and legislation can be bought. But it is surprising how cheap it is. Oligopolies everywhere you look. No wonder we have such sticky domestic inflation. But demand is tanking from the bottom 80% of consumers and that will still get the job done on inflation. It will just take longer than it should.
Fair bit of crap going down here about rate increases. I've been nearly 8 years in a Ryman Village paying the same weekly fee $99 which covers RATES, insurance, lawns,gardens, window cleaning, library, gym, bowling green, entertainment etc etc. I've now been joined by a lovely partner and we share the weekly fee! I know some here will rant on about the loss of capital gain but who cares.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.