Annual inflation in New Zealand has jumped to its highest level in two years, signaling to small and medium businesses that there’s no immediate relief in sight from cost pressures that have now been squeezing margins for years.
Stats NZ data shows inflation rose to 4.1 per cent in the 12 months to June — the sharpest annual increase since mid-2024 — and edged up by 1.5 per cent in the June quarter.
The spike has been largely fuelled by higher petrol, diesel and electricity costs, to which many small and medium businesses are exposed, and may be the catalyst for further interest rate rises. For SME owners, the announcement serves as a warning that although the economy has resumed its post-recession recovery, budgets will likely remain under pressure for some time to come.
“Businesses are showing resilience but they will continue to navigate higher costs, economic uncertainty and softer consumer demand which impacts real-time wage growth for employees and business expansion plans,” says Employment Hero APAC Managing Director, James Keene.
Fuel Costs Have Driven Inflation Upwards
Fuel has been singled out as central to the inflation surge, after the conflict in the Middle East forced prices high in April before they eased in May and June. Petrol prices rose 27.5 per cent over the year, while diesel soared by 71 per cent.
“Higher petrol prices accounted for almost a quarter of the 4.1 per cent annual increase,” says Stats NZ prices and deflators spokesperson Nicola Growden. Petrol and diesel costs are responsible for almost two-thirds of the 1.5 per cent quarterly increase.
Stats NZ notes that inflation would be more manageable had the conflict not occurred. If petrol and diesel prices had not risen, it says the CPI would have been 2.9 per cent in the 12 months to June.
“While oil prices have pulled back from their initial highs, ongoing geopolitical tensions could keep them elevated for some time,” says Satish Ranchhod, Senior Economist at Westpac NZ.
This is important for small and medium businesses exposed to logistics, trades and manufacturing, particularly if they are making pricing decisions and managing cash flow in the weeks and months ahead.
Pockets Of Relief Among A Range Of Price Rises
Fuel has also contributed to higher construction costs, which are up 2.7 per cent annually and 1.6 per cent for the quarter. “The quarterly rise for construction was the largest since the December 2022 quarter,” Growden says. “Respondents reported that higher costs for materials, subcontractors, fuel, and labour contributed to rising prices for new housing.”
SMEs are also exposed to other CPI contributors: electricity, which is up 12 per cent, and local authority rates and payments, which are 8.8 per cent more expensive than a year ago. Stats NZ says more than 80 per cent of expenses in its CPI basket increased in price in the 12 months to June.
Still, the data identifies some pockets of price relief. Rent growth has slowed to just 0.5 per cent annually, its weakest pace in around two decades. This is good news for SMEs with commercial leases up for renewal or staff feeling the pinch on housing, but not for business owners relying on supplementary rental income from investment properties.
The price of some supermarket staples has also softened, with fruit and vegetables barely moving and grocery items well below the CPI, while domestic air travel is cheaper than a year ago.
Economists Now Have Eyes On Underlying Inflation
Despite the renewed rumblings in the Middle East, the Reserve Bank believes inflation has peaked and is on the way down. It had previously forecast a peak of 3.9 per cent — below the eventual 4.1 per cent figure — while forecasting the CPI would return to 2 per cent by mid-next year.
Although the headline 4.1 per cent figure is most commonly cited, the Reserve Bank of New Zealand (RBNZ) also watches core inflation for monetary policy decisions. Core measures, which strip out volatile items like fuel and food, are sitting between 2.5 and 3 per cent, towards the upper end of the target 1-3 per cent band.
“At this stage, underlying inflation pressures are still looking relatively contained,” says Westpac’s Ranchhod. “With core inflation softening, the result was not as worrying as the RBNZ might have feared. But inflation is still high. We continue to expect further OCR hikes at the September and December meetings.”
Indeed, RBNZ Governor Anna Breman has flagged that more interest rate rises are likely if the Reserve Bank is to achieve its goal of preventing inflation from becoming embedded in the economy. Markets are now pricing in two more rate hikes this year.
Wages Are Stagnating But There Is Room For Cautious Expansion
High inflation not only means elevated input costs for businesses, it makes it harder for employees to make ends meet if wages don’t keep pace. In the same time the CPI has risen 4.1 per cent, Employment Hero’s Jobs Report data reveals there has been zero wage growth among SME employees in the year to June. The figure for June itself is also zero, and while the three-month trend is more positive, up 1.7 per cent, this still equates to a real-time pay cut for workers who now have around 4 per cent less purchasing power than last winter.
Keene expects wage growth will continue to stagnate, as the higher unemployment rate creates less competition for candidates and fewer opportunities for employees to jump ship.
But amid the challenges, he sees some green shoots in the Jobs Report data. “The first half of this year has been a period of small but positive growth for many businesses with our latest Jobs Report data for June showing employment growth was up 1.3 per cent month-on-month in June, the highest monthly gain in six months,” he says.
The figures suggest businesses are expanding where they need to but still lack the confidence to ramp up for growth, with some sectors more vulnerable than others.
“With inflation rising, businesses will likely be cautious as we get deeper into the second half of the year. It’s also another major hit for the retail and hospitality sectors with discretionary spending forecast to pull back.”
