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.
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