Inflation has surprisingly fallen to its lowest level in more than a year, but domestic pressures are now the dominant factor and likely to ensure interest rates stay high for a prolonged period.
Stats NZ said consumer prices rose 1.2 percent for the three months ended March, with the annual rate falling to 6.7 percent from 7.2 percent, well below forecasts.
The main drivers continued to be household costs, such as rents, rates and maintenance, food prices, and building costs.
Food costs were the main component of the annual rise, increasing 11.3 percent on the back of more expensive fresh fruit and vegetables, groceries and takeaway/restaurant meals.
Food costs were the main component of the annual rise, increasing 11.3 percent on the back of more expensive fresh fruit and vegetables, groceries, takeaways and restaurant meals. Photo: RNZ / Richard Tindiller
"Inflation is still at levels not seen since the 1990s," Stats NZ consumer prices senior manager Nicola Growden said.
The key offset for the annual rate was was an 8.3 percent fall in petrol prices.
However, domestically generated price pressures, known as non-tradable inflation, are now the main driver of the overall rate, rising 6.8 percent for the year from 6.4 percent.
International or tradable inflation has eased to a 6.4 percent annual increase from 8.2 percent on the back of softer lower energy, commodity, and supply chain costs.
"Annual inflation remains painfully high. However, inflation looks like it has now peaked. Core inflation, while still high, is not pushing higher," Westpac senior economist Satish Ranchhod said.
"Interest rates have been on the rise for over 18 months. Although price pressures still remain very strong, we're now seeing signs that the rise in prices is starting to lose some steam."
An 8.3 percent fall in petrol prices helped offset the rise in food and housing costs in the annual inflation rate. Photo: RNZ / Dan Cook
ASB senior economist Mark Smith said there were still inflation risks lurking, such as the impact of the floods and Cyclone Gabrielle, and core or underlying measures of inflation were still stubbornly high at close to 6 percent.
"The more persistent and policy relevant domestic and core inflation measures have showed few signs of slippage and remain well above the 1-3 percent inflation target band."
He expected a 25 basis point rise for the official cash rate to 5.5 percent next month, and then the RBNZ headed to the sidelines for a prolonged period.
"Today's CPI report suggests that past OCR hikes are gaining traction. OCR cuts will only be contemplated when sub 3 percent CPI inflation is in prospect, but this is unlikely to be seriously considered until well into 2024," Smith said.
The New Zealand dollar fell nearly half a cent against the US dollar to 61.5 US cents as investors bet on the prospects of rate cuts sooner than signalled.
The previous Consumers Price Index released in January showed prices rose 1.4 percent for the three months ended December, an annual inflation rate of 7.2 percent. The rising cost of living has already caused many New Zealanders to experience a serious financial pinch.