Last week’s inflation print was no good... no good at all. The headline print of 0.6% on the quarter, and 3.1% over the year was slightly above our forecast 3.0%... but it was the dirty details that did us in (see our full review here).

There was a lift in petrol prices and airfares... we saw that coming. And tradables (imported) inflation lifted 0.7% to 2.6%. Not helping. But it was the heat in the domestic inflation that disappointed us the most. Non-tradables (domestic) inflation lifted 0.6%, running at 3.5%. We need that back down at 3% or below. Housing and utility costs remain heated, with electricity prices sparking concern at 12.2% over the year. There was also a notable lift in home construction costs. With construction contracting, you'd expect cost pressures to be easing. Not in this quarter.

In the same vein, the December quarter usually see’s some softness across retailing goods given the usual round of discounting that comes with the holiday period. Again, not this time. The percentage of retail goods that were discounted over the December quarter dropped to just 15% down from 20% the same time last year. And the average discount applied was 10%, smaller than the 13% a year ago. For household furniture specifically, the average discount was just 3% compared to the 11% in December 2024. Discounts in 2025 just didn’t stack up to previous years. Instead, prices for clothing & footwear increased 0.8%, while household contents & services lifted 0.6%. Both stronger prints than we had expected. Still, it’s too premature to suggest a shift in demand just yet. Recent business surveys still lament the lack of demand. Rather, it seems that costs are building up and squeezing profit margins even tighter. It feels to us to be more of a cost push, rather than demand pull type of inflation.

Another concern is that we can’t just point the finger at administered costs for higher inflation. For some time, it had been items like council rates, electricity and the like, pushing headline inflation higher. But if we remove these government charges, headline inflation is within the RBNZ’s target band but is pushing higher – from 2.4% to 2.6%. There are other (frustrating) hot spots within the CPI basket. And that’s also reflected the stickiness in underlying inflation. Excluding food and energy prices, core inflation held at 2.5% after being on a general downtrend since hitting the peak in late 2022. Trimmed mean is another way of excluding volatility in inflation, and that measure accelerated to 2.8% from 2.5%. That’s not what we wanted to see.

With all that said, we still expect inflation to fall back within the RBNZ’s 1-3% target band. A move below 2% however looks less likely given tentative strength in domestic inflation – even if we exclude housing (rates and utilities).

The newly minted Governor and RBNZ officials are “laser focussed” on inflation, as they have always been. Above-target inflation and the plethora of good news, especially the lift in business confidence, means the need for further rate relief is evaporating, fast. Market traders have turned their attention to the possibility of rate hikes (not cuts) this year, with two full hikes priced in wholesale rates markets (namely the OIS strip). We agree, the next move is likely to be a hike. And we hope that is the case. Because rate hikes follow an economy that has recovered. But we think it is still a story for 2027. Although the risk of a hike this year is steadily increasing.

Financial Markets

The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.

In rates, a string of good data see’s Kiwi rates back at December highs

“Kiwi rates backed up to their December highs last week. This was driven by a string of good data and some offshore participants closing positions in anticipation of a strong CPI print. Aussie jobs data coming in well above market expectations and saw NZ yields dragged higher again. RBA pricing for the February meeting has a hike now more likely than not.

On the day, as most were already expecting a print of at least 3% there was a muted reaction to the actual CPI print coming in at 3.1%. Though tradables and other usual suspects like power and administered charges were the biggest culprit, most concerning was the breadth of price increases, with 80% of items in the basket higher year on year. Following this most local banks economists have all pulled forward their call first hike into 2026 in close alignment with market pricing of 50bps of hikes priced into 2026.

The RBNZ governor was typically circumspect in interviews on Friday. Didn’t want to give impression they would be too reactive to a single data point however all things equal they will need to revise their forecast for 2026 to some extent.” Matthew Crowder, Balance Sheet Manager – Treasury.

In currencies, speculation on potential Yen intervention pushes the Greenback lower

“Last week was an eventful one, with the World Economic Forum at Davos in focus. Trump was the highlight (?) of the show following the fracas that ensued after he indicated in the days prior that he would accept nothing but total US control of Greenland. However, this ruthless rhetoric from POTUS was wound right back by Wednesday, with market participants calling it the return of the ‘TACO’ trade phenomenon (IYKYK). In other words, risk sentiment took a dive at the start of the week and then returned almost in full force by the end of the week as Trump backed down. Positive data prints out of the US on Thursday night gave some additional fundamental support to the return of positivity. Across the week, the US dollar generally declined, and there was a level of angst under the surface, represented especially in Gold prices which yesterday hit a record high of US$5,111 an oz. The Kiwi and Aussie dollars already had a lot to contend with last week, but antipodean data surprises on both sides further kept us on our toes. The Aussie dollar was initially the outperformer in the last half of the week, following the strong labour market print on Thursday. Jobs growth was significantly higher than forecast and the unemployment rate surprised with a dip to 4.1% in December. On Friday it was the Kiwi dollar’s turn for a surprise, with the Q4 CPI print coming in at +3.1% y/y versus the anticipated +3.0%. The Kiwi data surprise was less welcome than that of our friends across the ditch, as inflation is clearly not moving in the right direction. The Kiwi rates market responded in turn (read rates commentary above), and the Kiwi dollar got another few legs higher into the 0.5900’s. On Friday evening, the Yen was in focus, with Japan’s PM Sanai Takaichi, warning that they would intervene if they observed unusual pricing in the Yen. This followed the BoJ decision on Friday afternoon to keep rates on hold, but there were hawkish tones to the accompanying media commentary, as they lifted their inflation forecasts. With the Yen having declined versus the dollar on the back of this, this may have been what prompted their comments about abnormal moves. Into the New York close there was a significant lift in the Yen vs the US dollar, and the softening Greenback gave the Kiwi and Aussie dollars further legs higher. The Kiwi hit an initial high of 0.5965 on Friday night. Intervention concerns have kept currency traders on their toes to start the week, with rumours of a coordinated intervention between Japanese and US financial authorities. On Monday this week, the Kiwi hit 0.5999 and may get further legs higher if the USD/JPY story continues to play out, with the DXY sitting precariously at 97.00. In addition to all the above, it’s another big week ahead on the Economic data front, with the Fed’s FOMC later this week. They are expected to remain on hold. Across the pond, the Aussie Q4 CPI print is out. As we saw last week, any surprises to the print (especially on the upside) may see the Aussie dollar get further legs higher.” Mieneke Perniskie – Senior Dealer, Financial Markets.

Weekly Calendar

• It's all eyes on the US Federal Reserve this week. After three straight cuts at the end of last year, the Fed is expected to keep policy on hold. The Fed's refreshed commentary and outlook will be of keen interest. Recent Fedspeak has leant hawkish, especially around inflation and the US job market stabilising. Those views may be formalised at this meeting. Fed Chair Jerome Powell's press conference is also eagerly anticipated where he may likely field questions around central bank independence.
• Across the ditch, Aussie inflation data is due out on Wednesday. Headline annual inflation is expected to rise to 3.6% from 3.2% over the December quarter. Monthly readings however suggest that the momentum in inflation has eased since the September quarter last year. The focus will be on the quarterly trimmed mean print which is expected to push out of the RBA's 2-3% target band to 3.3% from 3%. The data is key to cementing (or retracting) expectations for a rate hike from the RBA next week.

See our 'Weekly Calendar' for more