Inflation could be normalising above 2%

This suggests extreme inflation is now fading, but at the same time, inflation could stay above the RBNZ's target midpoint of 2%.

However, ANZ continues to expect a picture of relative resilience in demand across the second half of the year, as the impulse from net migration, sizeable fiscal stimulus in the next 12 months, improving business sentiment and a reanimating housing market conspire to prevent the economy from rolling over as quickly as the RBNZ currently forecasts.

Housing-related costs (28.3% of the CPI basket) remain a key driver, rising 1.2% quarter-on-quarter (q/q) – stronger than the 0.8% q/q pencilled in.

Construction cost inflation is below the historical average, as expected, given weakening demand and fading supply-side disruption, says Sharon Zollner, ANZ chief economist.

Home construction costs fell to 11.5% y/y and although still elevated, it is a sharp fall from the 18% peak of  late 2021, says Kiwibank. It expects to see a further slowdown.

“As one of the main drivers of domestic inflation, a slowdown in housing will help drive a slowing in domestic inflation to 6.3%,” says Jarrod Kerr, Kiwibank’s chief economist.  “However, rising mortgage rates and the housing market correction continues to weigh on the building sector.”

Zollner says it remains unclear how far construction cost inflation will fall, given still tight labour market conditions, a housing market showing signs of life, and residential construction intentions rising off their lows in recent months.
Rent prices are also a contributory factor and they were up 1.1% q/q, to be up 4.2% y/y.

ASB chief economist Nick Tuffley says the lift in rents over the quarter is one of the first meaningful signs the recent surge in net migration is contributing to inflationary pressures. According to StatsNZ’s rental price index, rents rose about 1.1% over the quarter and almost 4% annually.

Next week’s labour market data will be crucial to see whether higher population growth is alleviating constraints in the labour market.

ASB and ANZ say while monetary policy is working to cool inflation pressures, there is a long way to go and the RBNZ cannot pat itself on the back yet. 

“It’s a long way back to target and that challenge will become increasingly evident once the low-hanging fruit of base-effects has all been gathered”, says Zollner.  

For now, the economy is evolving broadly in line with the RBNZ’s expectations. However, we’d caution against any complacency that the battle against inflation is over.