ASB: Has Inflation Peaked?

ASB note that “the inflation outlook is uncertain, but we appear to have been a tad premature in thinking annual CPI inflation had peaked in mid-2022. Our latest add-up suggests inflation ended 2022 at a 7.4% annual rate, the highest since 1990.”

• “This is in line with RBNZ estimates, but if it were not for sharply lower retail fuel prices in Q4, annual inflation would likely have been closer to 8%. Underlying details will be alarming for the RBNZ, with annual non-tradable inflation expected to hit a new record high, core inflation rates close to (or at) multi-decade highs, and with the clear risk of increasingly widespread price increases.”
• “Downside risks to the inflation outlook look to be accumulating. However, the starting point for inflation is way too high and the risk of a pronounced overshoot of the inflation target means that the RBNZ does not have the luxury of sitting on its hands.”
• “The return of inflation to the 1-3% inflation target band is still not assured, so the least regret from the RBNZ still hinges on doing too little on OCR settings rather than too much. We expect a further 125bps of OCR hikes in the coming months (including 75bps in February). High inflation will need to be conquered before OCR cuts are actively considered.”