PHOTO: FILE
ASB anticipates a decline in inflation by the end of last year; however, it foresees that reductions in interest rates are unlikely until at least the latter part of 2024. Stats NZ is set to unveil its Consumer Price Index (CPI) on Wednesday, serving as a gauge for inflation among New Zealand households.
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ASB economists project a 0.5 percent quarterly uptick in the headline CPI for the fourth quarter (September to December). Despite this, ASB predicts a drop in annual inflation to 4.7 percent from December 2022 to December 2023, marking the lowest level since early 2021.
This forecast by ASB is slightly more conservative than that of the Reserve Bank (RBNZ), which projected a 0.8 percent quarterly increase and an annual inflation rate of five percent.
ASB Senior Economist Mark Smith noted that declines in food prices and selected consumer durables are expected to result in a generally stable quarter for tradable prices. Monthly food prices saw a 0.1 percent decrease in December 2023 compared to November 2023, marking the fourth consecutive monthly decline. Annual food price inflation in December was 4.8 percent, with ASB anticipating a drop below three percent by mid-2024, providing relief to consumers.
Decreases in petrol, accommodation, tobacco, and alcohol prices in December are seen as contributing factors to the downward trajectory of inflation. Smith highlighted that the unraveling of the price premium accumulated during the COVID period is expected to be the primary driver for a return to sub-three percent CPI inflation by the second half of the current year.
Nevertheless, Smith expressed caution, noting that overall CPI inflation has exceeded the upper limit of the 1-3 percent inflation target range for nearly three years. He emphasized the lingering uncertainty in the inflation outlook. Smith suggested that the RBNZ would remain vigilant against the risk of CPI inflation persisting above three percent and would uphold restrictive official cash rate (OCR) settings until achieving sustained inflation below the target.
While acknowledging the potential for gradual OCR cuts starting from the second half of 2024, Smith cautioned that if progress in lowering inflation stalls, OCR cuts could be postponed until 2025.