Inflation Expectations Creep Up as Kiwi Businesses Brace for Price Pressure

Reserve Bank survey shows mixed signals on inflation and wage growth, raising eyebrows in policy circles

Inflation is back on the radar for New Zealand businesses — but not in the way that might spark panic at the Reserve Bank just yet.

The first-ever Reserve Bank Survey of Business Expectations shows a modest uptick in anticipated consumer price inflation across all time frames. Still, wage growth expectations are cooling off, a contrast that may ease pressure on the central bank to take immediate action.

Prices Seen Edging Higher, But Staying Within Bounds

There’s a clear theme from the new data: businesses are pricing in more inflation, but still expect things to stay within the Reserve Bank’s 1% to 3% target band.

The average one-year-ahead CPI inflation expectation has risen to 2.44%, up from 2.25% in the previous quarter. The two-year outlook also nudged higher, from 2.47% to 2.54%.

That’s not a dramatic surge. But the across-the-board increase signals a broader sentiment shift. Businesses in key sectors like construction, retail, and manufacturing all lifted their short-term inflation forecasts.

Just one sector bucked the trend — the primary industry. There, inflation expectations for the next year dropped to 1.44%, down from 2.14% previously. That’s a sharp fall, and could reflect cooling export markets and softer commodity prices.

Sector Breakdown: Inflation Expectations by Industry

The Reserve Bank’s new survey breaks down CPI inflation expectations across industries. It’s the kind of detail that helps economists read the tea leaves.

Here’s what the one-year-ahead inflation expectations look like:

Most sectors are in a tight band just below 2.5%. The outlier? The rural economy — showing more deflationary vibes than inflationary ones.

“It’s an indication that some parts of the economy are still grappling with lower demand, and that’s helping hold overall inflation in check,” one bank economist told the NZ Herald.

No Surge in Wages — Yet

While inflation expectations are drifting higher, the same can’t be said for wage growth.

The average one-year-ahead wage inflation forecast has dipped to 2.59%, down from 2.84% last quarter. That’s a 25-basis-point drop — not insignificant. The two-year wage outlook barely moved, slipping just two basis points to 3.19%.

This is important because wages feed directly into inflation. If businesses were planning big pay hikes, that could signal inflationary pressure building from within. But that’s not what’s happening here.

One-liner for rhythm.

And this next bit makes it even more interesting:

• Wage growth expectations are easing across most industries, particularly outside of high-skill sectors.

• There’s no indication of a tight labor market forcing employers to offer more.

• Consumer demand remains subdued, which might be tempering employers’ willingness to pay more.

So, even with prices expected to rise modestly, the labor cost side isn’t adding fuel to the fire.

Mixed Economic Signals Put RBNZ in a Holding Pattern

What’s the Reserve Bank likely to make of all this? That’s where things get tricky.

On the one hand, inflation expectations moving up can cause concern. Central banks don’t just respond to actual inflation — they’re also sensitive to how people think inflation will behave. If the public believes inflation is coming back, it can become a self-fulfilling prophecy.

But on the other hand, those expectations are still well below 3%. And the easing of wage growth pressure offers some breathing space.

There’s another angle too: weak consumer demand and sluggish GDP growth. Those realities, coupled with tighter financial conditions, give the RBNZ enough cover to sit tight for now.

The market seems to agree. Most economists aren’t expecting any major monetary policy moves in the next quarter unless something unexpected crops up.

Businesses Are Still Playing It Safe

Beyond the numbers, the mood among Kiwi businesses seems cautious. Inflation is back in the conversation, but it’s not dominating boardroom discussions the way it did in 2022 or 2023.

That said, the rising inflation expectations might influence pricing strategies heading into the second half of 2025. Companies are keeping an eye on food prices, which have already begun to inch higher and could lift headline CPI further if the trend holds.

Still, there’s no rush to pass costs onto consumers just yet. Why?

And because no one wants to be the first to blink in a competitive market.

That’s the vibe: cautious optimism, paired with a watchful eye on price tags and payrolls.

Eyes on the Second Half of the Year

As winter sets in, businesses and policymakers alike will be monitoring a few key metrics closely:

• Will food inflation persist and drive CPI higher?

• Can wage growth stay muted even if unemployment ticks down?

• And will global factors — like fuel costs or shipping delays — inject fresh volatility into local prices?

For now, the Reserve Bank has data that allows it to stay calm. Inflation is creeping, not sprinting. Wages are cooling, not overheating.