New Zealand's annual inflation rate is forecast to hit a two-year high of at least 4% in the June quarter, significantly up from 3.1% in the March quarter. Westpac senior economist Satish Ranchhod predicts a 4.1% increase, while the Reserve Bank of New Zealand (RBNZ) had estimated a 3.9% reading, which it previously thought would be the peak of the current cycle. This surge is largely attributed to a spike in fuel prices, particularly impacting vehicle fuels and diesel, which are up 23.6% and 57.1% for the year, respectively.
The primary driver of this inflation is the sharp increase in fuel costs, with some economists, like ASB senior economist Mark Smith, estimating that surging vehicle fuel prices will directly account for approximately 75% of the quarterly increase. This fuel price hike is linked to the US/Iran conflict causing the closure of the Strait of Hormuz and a rebound in global oil prices. The RBNZ and economists are closely monitoring whether these high fuel prices will spill over into broader inflation pressures across the economy.
Economists anticipate that the Consumers Price Index (CPI) inflation rate for the quarter will range from 1.4% (ASB) to 1.5% (other economists). Despite the significant headline number, some banks like ASB and Kiwibank caution against over-interpreting it, noting that core inflation, which excludes volatile items like food and fuel, remains comparatively contained. However, RBNZ chief economist Paul Conway has expressed concern about firms' pricing behavior, noting their tendency to pass on cost increases quickly but reduce prices slowly, which could embed temporary fuel-driven shocks into longer-term inflation expectations.
Business surveys indicate an increasing intent by firms to raise prices. In the first quarter of this year, around 43% (net) of firms intended to increase prices, up from 25% in the last quarter of 2025. More recent data suggests an even stronger trend, with a net 51.9% of firms planning price increases in the next three months, and Westpac reporting a net 54% intention for the September quarter. This corporate pricing behavior, along with lingering core inflation above the RBNZ's 2% midpoint target, provides impetus for the RBNZ to potentially continue lifting interest rates, possibly pushing the Official Cash Rate above 3.25% if inflation remains high.
