2% So Close You Can Almost Taste It.

• Kiwi inflation is stabilising. The headline rate was unchanged at 2.2% at the end of 2024. With each release, we grow in confidence that the inflation beast is back in its cave.
• There is more disinflationary pressure in the pipeline as the economy continues to operate below its productive capacity. Tradables is the reason we have returned to 2%. And the eventual normalisation in domestic price pressures is why we see 2% sustained in the medium-term.
• The light at the end of the tunnel is burning brighter. Cost pressures are easing. Great news for businesses and households, as interest rate relief is coming thick and fast. Policy settings are still restrictive, but more interest rate cuts are coming. We expect another 50bp cut in Feb. Falling inflation, and falling interest rates will help household budgets, and business opex.

Kiwi inflation is stabilising. Over the December quarter, consumer prices rose 0.5%, leaving the annual rate unchanged at 2.2% - a whisker stronger than the market estimate of 2.1%. With each release, we grow in confidence that inflation is becoming well contained. It took some time (2½ years), but the beast is finally back in its cave.

The good news – deflation pressures are becoming more broad-based. Over the December quarter, there were more goods and services recording a decline in price. Indeed 251 items in (or almost 40% of) the CPI basket recorded price decreases – the most since 2020, or 2017 excluding covid. At the same time, there were fewer goods and services recording price hikes. In fact, for the first time since the end of 2020, just under half of the basket recorded a price increase.

In even better news – the underlying trend in consumer prices continues to cool. The various measures of core inflation confirmed as much. Stripping out the volatile price movements in food and fuel, annual core inflation is down to 3% from 3.1%

Onwards and downwards.

Looking at the CPI report card, there's enough disinflation in the data to support further rate cuts from the RBNZ. And a 50bp cut to 3.75% in February is pretty much a done deal. We'll then see, most likely, another cut to 3.5% in April (or May). It's the next move(s) below 3.5% that's in question. The RBNZ is signalling a pause at 3.5%... a long pause... We believe more needs to be done to stimulate the recovery into 2026 and beyond. We believe the inflation problem is no more. We believe households and businesses need rate relief. And we believe the RBNZ will be forced (once again) to deliver more, not less.

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