Inflation was slightly stronger than expected in the March quarter. Prices were up 0.9% over the quarter and 2.5% over the past year. However, underlying inflation pressures remain well contained.
Consumers Price Index, March quarter 2025 – key stats
Headline inflation
- Quarterly change: +0.9% (prev: +0.5%)
- Westpac forecast: +0.8%, RBNZ (February MPS): +0.8%
- Market median: +0.8%, range +0.3% to. +0.9%
- Annual change: +2.5% (prev: +2.2%)
- Westpac forecast: +2.4%, RBNZ (February MPS): +2.4%, Market: +2.4%
Non-tradables
- Quarterly change: +1.1% (prev: +0.7%)
- Westpac forecast: +0.9%, RBNZ (February MPS): +0.9%
- Annual change: +4.0% (prev: +4.5%)
Tradables
- Quarterly change: +0.8% (prev: +0.3%)
- Westpac forecast: +0.7%, RBNZ (February MPS): +0.7%
- Annual change: +0.3% (prev: -1.1%)
Consumer prices rose 0.9% in the March quarter. That saw the annual inflation rate rising to 2.5%, up from 2.2% in the year to December.
The March quarter inflation result was a little above the 0.8% rise that we and the RBNZ were expecting.
However, the RBNZ’s forecast was finalised back in February. Since that time, we’ve seen large increases in the prices of volatile items like food and overseas holiday costs, which are not the key focus for monetary policy. In addition, today’s result was boosted by a change in how tertiary education costs are measured.
More generally, the underlying trend in inflation is looking well contained, with measures of core inflation trending back to levels consistent with the RBNZ’s target band.
What underpinned inflation in the March quarter?
Much of the rise in consumer prices in the March quarter was related to large price movements in a few specific areas:
- Petrol prices (3.5%) of the CPI were the largest contributor to quarterly inflation, rising 4.6%.
- Food prices (18% of the CPI) were up 1.8% over the quarter. That was mainly due to a large 3% rise in grocery food prices, with higher prices for items like milk and cheese as dairy prices have risen.
- There have also been increases in the cost of chocolate and other snack foods (just in time for the Easter holidays).
- The March quarter also saw the annual increase in the tobacco excise tax, with cigarette and tobacco prices up 3.8%.
Balanced against those price rises, the March quarter saw an 8% fall in international airfares, which typically decline at this time of year.
There were a couple of other notable price movements:
- There was a 23% increase in tertiary education costs. This was due to a measurement change related to how fee-free programs are measured. If not for this change, tertiary education costs would have been up 5%. This very large surprise accounts for the bulk of the upside surprise to our non-tradables forecast.
- Average housing rents were up 0.7% over the past three months. Rents are the largest component of the CPI and we typically see larger increases at this time of year. However, this year’s increase was the lowest March quarter result since 2019.
- The cost of purchasing a newly built home was up 0.6% in March quarter and is up just 1.9% over the past year. That’s the smallest annual increase since 2010 and reflects the protracted downturn in building activity over the past year. We’re forecasting homebuilding activity will remain subdued over the year ahead.
- We also saw further solid increases in insurance premiums over the past three months. However, after very large increases over the past year, the pace of those rises is now easing off as many insurance policies have rolled on to higher premiums.
Annual and core inflation – Contained, despite quarterly volatility.
Annual inflation rose to 2.5% in the March quarter. That’s up from 2.2% in the year to December, but still well within the RBNZ’s 1% to 3% target band.
The recent uptick in annual inflation is due to a turn-around in tradable prices (mainly imported goods).
- Tradable prices rose 0.8% in the March quarter, leaving them up 0.3% over the past year. Looking at the longer-term trend, tradables inflation remains low, but prices aren’t dropping like they did last year when the combination of lower import costs and soft domestic spending resulted in prices falling for many consumer goods, like furnishings and apparel.
- Looking ahead, we don’t expect a return to the high rates of tradables inflation that we saw in the wake of the pandemic. However, with the drop in the NZ dollar since late last year and prices already picking up, tradables inflation is expected to continue pushing higher over the coming months. That’s important as it will limit the downside for overall inflation over the remainder of this year.
Domestic prices (aka. non-tradables) were also stronger than we or the RBNZ expected, with prices rising by 1.1% in the March quarter. In annual terms, non-tradables inflation has cooled, but by less than expected, slowing to 4.0%, down from 4.5% in the year to December.
- As noted above, the stronger than expected non-tradables inflation in the March quarter was mainly due to the large increase in education costs, rather than increases in the more cyclical components of domestic prices.
- Looking at non-tradable prices more generally, we are seeing pressures easing, consistent with the softness in domestic activity which has seen muted growth in wages and service sector prices. We’ve also seen an easing in rents and subdued increases in the cost of new housing. Price changes on this front will be a key focus for the RBNZ.
Looking at the longer-term trend in consumer prices, inflation pressures are looking well contained. That was evident in the various measures of core inflation which have continued to trend down and are now back inside the RBNZ’s target band. (Core inflation measures smooth through volatile quarter-to-quarter movements and instead track the underlying trend in prices. They are a key focus for the RBNZ when assessing the strength of inflation pressures.)
In terms of specifics:
- Inflation excluding food, fuel and energy costs fell to 2.6% from 3.0% previously.
- Trimmed mean inflation fell to 2.3% from 2.4% previously.
- Weighted median inflation fell to 2.2% from 2.6%.
Outlook
Inflation is comfortably inside the 1% to 3% target band, and we expect that it will remain there over the year ahead. Even so, it’s likely to linger above 2%. While domestic price pressures are gradually easing, there are still some pockets of pressure (like local council rates). In addition, imported price pressures won’t be the large drag that they were last year.
We’re now watching to see how the domestic economy responds to the sharp easing in borrowing costs which is working its way through the economy. And of course, we’re keeping a close eye on global conditions and the New Zealand dollar which are clouding the longer-term outlook for imported inflation.
