Has Inflation Peaked? Well, yes but what will happen next?

Last week the Reserve Bank kept its official cash rate on hold at 5.50%, after a dozen consecutive hikes which confirms the RBNZ’s long hiking cycle may have finally come to an end.

This week annual inflation for the second quarter of this year as measured by The Consumer Price index came in at 6.0% which is down from 6.70% in the first quarter and 7.20% last December. Prices are still increasing at rates not seen since the 1990s but are rising at a lower rate.

Rising food prices remain the biggest problem, and were the largest contributor, due to rising prices for vegetables up 23.30% (thanks in part to disastrous weather in the North Island), as well as ready-to-eat-food, milk, cheese and eggs.

So, what happens next and when will we start to see interest rate cuts?

The good news is global growth is weak and global inflationary pressures are easing, supply chains are performing better and NZ export prices are weakening. NZ consumer spending and construction are falling, businesses report fewer capacity pressures and more problems with weak sales. Labour market pressures are easing as net immigration increases. Rising unemployment will moderate wage growth and help to bring down inflation over time. The real estate market appears to have “bottomed out” with average prices being flat for each of the past three months in seasonally adjusted terms.

Has the RBNZ done enough to get inflation under control? Most economists think yes they have, with a small chance of another rate rise later this year. However, the current inflation rate of 6.0% is a very long way from the Reserve Bank target range of 1.0% to 3.0%. The RBNZ will remain wary for at least the rest of this year and deceleration in global and NZ inflation rates will likely remain modest at best.

I would not expect any significance cut in interest rates until the middle of next year at the earliest.