The Reserve Bank is warning that New Zealand remains vulnerable to another prolonged period of inflation if businesses and households begin treating recent price shocks as permanent.
In a major economic speech delivered in Wellington, Reserve Bank Chief Economist Paul Conway examined how conflict in the Middle East, disruption to global shipping and volatile oil prices are continuing to affect the cost of living in Aotearoa.
Although some immediate pressure has eased following the partial resumption of shipping through the Strait of Hormuz, the Reserve Bank says the inflationary effects of the disruption will continue moving through global supply chains for some time.
The Bank had previously forecast annual inflation of 4.2 percent in the June quarter and 4.3 percent in the current quarter. Those forecasts have since been revised down to 3.9 percent and 3.3 percent respectively as oil and shipping pressures eased, although renewed instability in the Middle East could still push prices higher.
Why oil prices matter
New Zealand imports much of its fuel and remains exposed to changes in international oil and shipping markets.
The temporary closure of the Strait of Hormuz removed an estimated 10 million barrels of oil a day from global markets and contributed to sharp increases in the prices of fuel, fertiliser, chemicals and industrial materials.
Higher international oil prices do not stop at the petrol pump.
They increase freight and transport costs, raise production expenses for businesses and add pressure to the cost of groceries, manufactured goods, construction materials and essential services.
For rural communities and the primary sector, more expensive fuel and fertiliser can quickly increase the cost of farming, food production and moving goods around the country.
The Reserve Bank says monetary policy cannot prevent households and businesses from feeling the initial impact of a global oil shock. Its role is to prevent that initial increase from spreading throughout the economy and becoming embedded in wages, prices and expectations.
Businesses are changing prices more quickly
New Reserve Bank research suggests New Zealand businesses now review and alter their prices more frequently than they did in the past.
During the post-pandemic inflation surge, firms changed prices about every five months on average. Digital systems have made it cheaper and easier for businesses to adjust prices quickly when costs rise or economic conditions change.
The Bank also found businesses have become more likely to pass rising costs on to customers, while being less likely to reduce their prices when those costs later fall.
That pattern is particularly evident in the services sector and creates a risk that temporary cost pressures become a lasting part of household expenses.
More than 90 percent of businesses surveyed identified labour and other input expenses as important reasons for changing prices.
The Reserve Bank is also examining whether limited competition in markets such as grocery retail, banking, electricity and building supplies allows some firms to raise prices more easily.
Expectations can keep inflation alive
Inflation is influenced not only by current costs but by what people believe will happen next.
When households expect prices to continue rising, they may change their spending and wage expectations. When businesses expect their own costs and competitors’ prices to increase, they may raise prices earlier or by more than would otherwise be necessary.
Reserve Bank research found households and businesses pay much closer attention to inflation when it sits above the official target range of 1 to 3 percent.
Inflation has been above that range for 14 of the 25 quarters since 2020, increasing the risk that elevated price expectations become part of everyday economic decisions.
Among households with a relatively accurate understanding of current inflation, average expectations for inflation two years ahead rose to 4.9 percent during the first quarter of 2026, with uncertainty also increasing following the Middle East conflict.
The concern is that once people begin believing high inflation will continue, it becomes more difficult and costly for the Reserve Bank to bring prices under control.
The lesson from the 1970s
The Reserve Bank says the oil shocks of the 1970s and 1980s provide a warning about what can happen when temporary price increases become embedded in the economy.
During that period, elevated inflation continued long after the original oil shock had passed. Bringing it back under control required years of restrictive monetary policy and contributed to higher unemployment.
New Zealand now has an inflation-targeting framework and a more flexible economy, reducing the likelihood of an exact repeat.
However, the Bank says the basic risk remains the same: once inflation expectations drift higher, restoring price stability becomes much more difficult.
Why this shock differs from 2022
The Reserve Bank believes the current economy is better placed to absorb the latest global cost shock than it was when Russia’s invasion of Ukraine pushed energy prices sharply higher in 2022.
At that time, economic demand was strong and businesses found it relatively easy to pass rising costs on to customers.
Today, weaker demand and spare productive capacity mean consumers are more price-sensitive and businesses may have less ability to increase prices without losing customers.
The Bank expects those conditions to help inflation return to the 2 percent midpoint of its target range over the next year.
However, that forecast depends on businesses and households continuing to believe inflation will eventually return to normal.
Government-controlled costs also contributing
The Reserve Bank has also highlighted the role of administered prices, which include charges influenced or determined by central and local government.
Increases in those prices contributed approximately 0.7 percentage points to annual inflation of 3.1 percent in the year to the March 2026 quarter.
That means inflation pressures are not being driven solely by overseas conflicts or private businesses.
Rates, levies, government charges and regulated services are also contributing to higher household costs.
Interest rates could remain under pressure
The Monetary Policy Committee has indicated that inflation remains above target while economic activity is expected to strengthen.
As a result, some further reduction in monetary stimulus may be required, although future decisions will depend heavily on whether businesses continue passing higher costs through to consumers.
The Reserve Bank says it will respond if inflation linked to the Middle East conflict proves more persistent than expected.
For mortgage holders, renters and businesses, that raises the possibility that borrowing costs could remain higher for longer.
Higher interest rates may help contain inflation, but they also increase mortgage repayments, place pressure on landlords and tenants, and make it more expensive for businesses to invest and employ staff.
Finding the signal in the noise
The Reserve Bank’s message is that every increase in oil, food or transport costs does not necessarily require an interest-rate response.
The challenge is determining which price increases are temporary and which are beginning to influence wider pricing behaviour and long-term expectations.
Medium-term inflation expectations remain relatively stable, and the Bank believes spare capacity in the economy should limit the ability of businesses to pass on every increase.
However, after years of above-target inflation, that stability cannot be taken for granted.
For New Zealand households already struggling with food, housing, power and transport costs, the difference between a temporary oil shock and persistent inflation could determine whether financial pressure eases—or continues well into the future.
#RadioWaatea #WaateaNews #Inflation #ReserveBank #OCR #CostOfLiving #InterestRates #MiddleEast #OilPrices #Economy #HouseholdCosts #Business #MāoriEconomy #Whānau #Aotearoa
