Easing inflation and falling cost pressures bring cautious optimism for small businesses in 2025, though challenges like a weak dollar remain on the horizon.
The annual CPI inflation for 2024 has settled at 2.2 percent, marking a four-year low and aligning within the Reserve Bank of New Zealand’s (RBNZ) target band of 1–3 percent. The December quarter saw a modest increase of 0.5 percent in CPI, driven by rising transport costs and rents, but offset by falling prices for vegetables and grocery items.
Ting Huang, Senior Economist at the New Zealand Institute of Economic Research (NZIER), notes the broad easing in inflationary pressures, particularly among small businesses. “Today’s CPI results are in line with the broad easing in inflation pressures as measured by the cost and pricing indicators in our latest NZIER Quarterly Survey of Business Opinion (QSBO). A significant proportion of our QSBO participants are small businesses with 20 or fewer employees, who have reported easing cost pressures and historically low price increases.”
Kiwibank economists echoed this optimism, highlighting stabilising inflation trends.
“Over the December quarter, consumer prices rose 0.5 percent, leaving the annual rate unchanged at 2.2 percent – a whisker stronger than the market estimate of 2.1 percent,” Kiwibank said in a statement.
“With each release, we grow in confidence that inflation is becoming well contained. It took some time (2½ years), but the beast is finally back in its cave.”
Deflationary pressures are now becoming more broad-based, with 40 percent of CPI basket items recording price decreases, the highest since 2020, or 2017 if excluding COVID-19 distortions.
“For the first time since the end of 2020, just under half of the basket recorded a price increase,” Kiwibank added. Core inflation, which excludes volatile food and fuel prices, has eased to 3 percent from 3.1 percent.
Despite these positive developments, challenges remain for small businesses. The depreciation of the New Zealand dollar has heightened cost pressures for certain sectors, particularly retail and manufacturing.
“Some proportion of firms in the retail and the manufacturing sectors reported that costs intensified in the December quarter. We expect the recent depreciation of New Zealand dollar to have played a part in this. This is an important development to watch for over the coming year as it may raise the prices of imported goods, which is an upside risk to inflation,” says Huang.
The RBNZ is expected to continue easing monetary policy, with a 50-basis-point cut anticipated in February. “Looking at the CPI report card, there’s enough disinflation in the data to support further rate cuts,” Kiwibank observed. “We believe households and businesses need rate relief and that the RBNZ will be forced to deliver more, not less.”
For small businesses, the easing inflation and expected rate cuts offer a chance to rebuild growth and profitability in 2025. However, as Huang cautions, “The transmission of monetary policy to broader economic activity tends to lag. It will take time for businesses to see their expectations for a recovery in demand translate into increased activity.”
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