This is the first test for an August cash rate cut. It’s widely expected that headline will push towards the top end of the RBNZ’s target band. But more important to policy is underlying inflation, which continues to ease. Spare capacity within the Kiwi economy is keeping downward pressure on domestically generated inflation.
Downside risks to medium-term inflation remain. Whether that’s a consequence of a slowdown in global economic growth, or a diversion of trade marked at a discount. There is still a case for more accommodative interest rate settings.
Kiwi inflation accelerated over the June quarter. Annual headline rose to 2.7% from 2.5%. It’s a move in the wrong direction. But context is key. A strengthening in imported inflation is driving headline higher. But domestic price pressures, on balance, continue to cool. And most importantly, the underlying trend in consumer prices is weak. Excluding the volatile movements in food and fuel, annual core inflation lifted to 2.7% from 2.6%. A move that was better than many had feared, and one that will improve into next year. For now, there’s little risk this bout of high inflation will persist. Especially given that there’s still significant spare capacity in the Kiwi economy.
Here’s a data dump. Non-tradables, domestically generated inflation, rose 0.7%qoq and 3.7% on the year. Excluding housing related stuff, it’s up 3.5%. And there’s good news for housing related stuff. Building costs fell 0.1%qoq (the lowest we’ve seen since 2021) and 0.8% over the year. That’s the weakness we’ve seen since 2009. Falling materials costs, like steel, match the anecdotes were hearing from developers. And wages within the industry have softened also. There’s less work. Renters face weaker rent rises as well. More good news. Rents rose 0.8%qoq and 3.2% over the year… down from 3.7% last quarter. So whilst we’re being hit with hefty food, electricity, insurance, and council rates… at least our rents aren’t rising as much… or if you own a property, interest rates are less painful (but at these levels, they still hurt, not help).
Mary Jo Vergara
Senior Economist
