A midwinter fall in food prices brought some relief to Kiwis but economists say bigger pressures are still conspiring to make inflation a threat.
Food prices fell last month after a long spell of punishing price increases.
Westpac economist Satish Ranchhod told the Herald the latest Food Price Index wouldbring relief to consumers, and the Reserve Bank.
The central bank would likely view the 1.1 per cent food price fall in July as a sign its efforts to combat inflation were having some success, Ranchhod said.
But he said the Reserve Bank and its Governor Adrian Orr would also be considering many other factors at home and abroad.
“We’ve seen pressures coming through in a couple of big fronts,” Ranchhod added. “The domestic economy is not weak.”
The labour market was still tight, making wage increases more likely, and other possibly inflationary influences were rental and volatile oil prices.
But countering that was deflation in China, making imports from that country cheaper and reducing Chinese demand for Kiwi exports.
That meant some smaller paydays could be in store for Kiwi exporters dependent on China.
Westpac has lowered its milk price forecast for 2023/24 to $7.50/kg.
Nathan Penny, Westpac senior agri economist, said deflation and the “underwhelming” recovery of the Chinese economy after Covid-19 were major factors driving that forecast.
“Households are low on confidence. That appears to be tied into ongoing weakness in the Chinese housing market,” Penny said of New Zealand’s biggest trading partner.
Unexpectedly high domestic milk production was likely to send dairy product prices down in New Zealand.
But it could take six months to a year for those lower prices to flow through to supermarket shelves and have a meaningful impact on household budgets.
The July Food Price Index was only the third time since December 2021 monthly prices had fallen.
But ASB economists were underwhelmed.
They said the 0.5 per cent fall in July food prices was weaker than expected, with annual food price inflation cooling from more than 30-year highs.
“Much of the surprise was due to sharp falls for fruit and vegetable prices likely related to the unwinding of the earlier Cyclone Gabrielle spike,” ASB added.
“What was also evident, however, is that the broadening front of food price rises in recent months appears to be narrowing.
“It could be that increased consumer resistance and lower global food commodity prices are dampening pressures at the retail level,” the bank economists added.
“However, the risk is that food price inflation does not slow as quickly as the RBNZ would like, with a high hurdle to prospective OCR cuts.”
The ASB economists said food price inflation should stay cool heading into 2024, but a difficult year still lay ahead for consumers.
Another major component of inflation - or deflation - was the cost of renting property.
Stats NZ said the stock measure of rental property prices, covering the entire rental population, was up 0.4 per cent in July, compared to the month before.
The more volatile index for the flow measure of rental property prices, which only covered a new tenancies in July, fell 0.1 per cent.
Stats NZ said both stock and flow rental property prices increased by 4.1 per cent nationwide over the past year.
ASB said dwelling rents were the largest component in the Consumers Price Index.
And the trends in this area were still inflationary, the bank economists said.
“Where they are able to, landlords are expected to pass on higher costs to tenants, with persistently high inflation and strong population growth likely to keep annual inflation from this component above 3 per cent,” ASB added.
John Weekes is online business editor. He has covered courts, politics, crime and consumer affairs. He rejoined the Herald in 2020, previously working at Stuff and News Regional, Australia.