New Zealand inflation hits 4.1%, fueling rate hike expectations

New Zealand's annual inflation accelerated to 4.1% in the second quarter, exceeding both the Reserve Bank's 3.9% forecast and the 3.1% pace recorded in the prior period, driven by a surge in gasoline and diesel prices that accounted for nearly a quarter of the headline increase.

"The result was not as worrying as the RBNZ might have feared as core inflation has softened, but inflation is still high," said Satish Ranchhod, senior economist at Westpac.

The consumer price index rose 1.5% from the prior quarter, above the 1.4% consensus estimate, according to data from Statistics New Zealand released Tuesday. Gasoline prices jumped 27.5% from a year earlier and 20.1% on a quarterly basis, while diesel surged 71.1%. Excluding fuel, the CPI would have risen just 2.9% over the 12 months to June 30. Non-tradeable inflation eased to 3.4%, its lowest level in five years and down from 3.5% in the first quarter.

The data reinforces expectations the RBNZ will deliver further rate increases at its September and December meetings after raising the official cash rate to 2.50% earlier this month — the first hike in three years. Westpac expects additional tightening at both meetings, while economists estimate the cash rate could be as much as 75 basis points below neutral, suggesting the central bank still has significant work to do to cool demand.

The New Zealand dollar rose 0.1% to $0.5843 following the release, while two-year swap rates climbed 3 basis points to 3.681%, reflecting increased bets on tighter monetary policy. The last time inflation exceeded the RBNZ's target by this margin was in mid-2022, when the cash rate was still near zero — a period that preceded 450 basis points of cumulative tightening over the following 18 months.

More than 80% of the CPI basket increased in price over the 12 months to June, while only about 15% fell, underscoring the breadth of price pressures across the economy. Electricity prices, local authority rates, and new home construction costs were among the other major contributors.

The RBNZ has projected inflation will ease to 3.3% in the third quarter as the boost from oil price increases linked to the Middle East conflict fades from the headline rate. But the recent resumption of hostilities in the region is again pushing crude prices higher, leaving New Zealand exposed to another external shock. Policymakers face a delicate balancing act: unemployment remains elevated while higher interest rates risk snuffing out tentative signs of economic recovery that emerged earlier this year.

This article is for informational purposes only and does not constitute investment advice.