Inflation may have peaked but cost of living will bite longer, economists say

New Zealand is probably over the worst of its bout of inflation but will have to endure cost of living pain for some time to come, economists say.

Figures released on Thursday showed a surprise drop in the annual inflation rate from 7.2 per cent to 6.7 per cent, although it remained at levels not seen since the 1990s.

BNZ head of research Stephen Toplis said inflation appeared to have peaked.

"We're probably past the worst in terms of inflation. The bad news is that it's going to take a while before it actually gets down to a level that the Reserve Bank is going to be comfortable with and a level where we stop feeling the pain of price increases," he said.

Toplis said the Reserve Bank would need to be sure inflation was heading towards its one-to-three percent target range before halting official cash rate hikes.

"We're still a long way from being within that target range and certainty about that target range, so we may have one or more interest rate increases to go yet," he said.

"The good news is we're very close to the top."

Kiwibank chief economist Jarrod Kerr told RNZ he also believed inflation had peaked.

"This time next year we're going to see prices rising at a much lower clip and maybe even a lowering of interest rates," he said.

"Inflation pressure is clearly easing and we should find ourselves with inflation rates of closer to three percent by the end of this year and then even cooler rates next year."

Kerr said he expected interest rate cuts by this time next year.

"We're already seeing a peak in interest rates now, it's just a matter of when the Reserve Bank is able to turn around and start cutting rates. We think that's a story for the end of this year."

Earlier this month the Reserve Bank hiked the official cash rate by 50 basis points to 5.25 percent, taking the benchmark rate to its highest level since late 2008.

Kerr said the Reserve Bank was going too far.

"I've said any move beyond five percent is a step too far and I think that will show up in future data and in a recession we're likely to have," he said.

Loan Markets mortgage adviser Bruce Patten said homeowners should take heart from the inflation figures.

"It should signal that the Reserve Bank can actually dwell on hold now and stop pushing rates up and causing the amount of anxiety that it has just in the last [fortnight] from that big 0.5 percent increase," he said.

"People's anxiety levels are really high at the moment because they're just seeing interest rates go up and up and up every time. It's a double-whammy because they're not just facing higher interest rates, they're facing this extreme cost of living increase."

The key offset for the annual inflation rate was was an 8.3 percent fall in petrol prices.

'The more you save, the more things go up'

Motorists filling up at a Christchurch petrol station on Thursday night told RNZ they had not noticed any difference in the cost of living.

A social worker, who did not wish to be named, said she felt particularly sorry for young families.

"More people are asking for assistance and that's just around the basics, like food and power. It's really, really sad to think we live in New Zealand and we're supposedly a first world country, but it actually feels sometimes like we're a wee bit of a banana republic," she said.

"You just think about childcare rates and that sort of thing, there are so many people who are really on the breadline and they're struggling. I get to see what's going on for families and it's not great."

Another motorist, Chad Elliott, said he wanted to buy a house but it was financially impossible.

"It's just out of the range now, so I'm flatting and just living week to week. The more you save, the more things go up. Your hourly wage doesn't go up, but everything else goes up. It's a very hard life," he said.

Anxious, highly-indebted mortgage-holders have been turning to Christchurch Budget Service for help.

Budget adviser Fran, who did not wish to use her surname, said more than 75 percent of clients did not have any savings.

"When you're talking about mortgage debt or repayments for car loans or just normal life, there's nothing. There's no fall-back, there's no back-stop, there's no bumper bar to stop the worst from happening," she said.

"When your back-up is to borrow, it's a perfect storm when interest rates go up and inflation goes up."

Buy now pay later schemes for groceries were a big concern, she said.

Stats NZ figures released on Monday showed food prices jumped 12.1 percent in March compared to the same time last year - the biggest annual increase in more than 30 years.

Cash-strapped shoppers told RNZ they were giving up on buying fresh fruit, vegetables and meat, while parents struggled to afford healthy food to fill kindergarten and school lunchboxes.