Cautious Optimism for Small Businesses in 2025 Amid Easing Inflation and Cost Pressures, Though Challenges Still Lurk

The annual Consumer Price Index (CPI) inflation rate for 2024 has notably settled at 2.2 percent, a significant milestone as it marks the lowest rate in four years and falls comfortably within the Reserve Bank of New Zealand’s (RBNZ) target range of 1–3 percent. During the December quarter, CPI saw a moderate rise of 0.5 percent, primarily driven by increasing transport costs and rising rents. However, this upward trend was mitigated by a notable decrease in prices for vegetables and essential grocery items, reflecting the complexity of price movements across various sectors.

Ting Huang, the Senior Economist at the New Zealand Institute of Economic Research (NZIER), has pointed out a general easing of inflationary pressures, particularly beneficial for small businesses. “The latest CPI results align perfectly with the widespread reduction in inflationary pressures as measured by cost and pricing indicators in our most recent NZIER Quarterly Survey of Business Opinion (QSBO). A substantial number of our QSBO participants are small enterprises with 20 or fewer employees, and they are reporting a decrease in cost pressures along with historically low price increases,” Huang stated, offering a sense of relief and cautious optimism among small business owners.

Echoing this optimistic outlook, economists at Kiwibank have also acknowledged the stabilisation of inflation trends in recent months. “Consumer prices increased by 0.5 percent in the December quarter, keeping the annual rate steady at 2.2 percent—a slight uptick beyond the market estimate of 2.1 percent,” Kiwibank said in a recent statement. “With each report, we are gaining increasing confidence that inflation is being effectively contained. It has taken some time—specifically two and a half years—but we are finally seeing this economic concern being managed,” they added, reinforcing the perception that inflationary threats may be diminishing.

Further analysis reveals that broad-based deflationary pressures are becoming apparent, with 40 percent of the items in the CPI basket experiencing price declines. This represents the highest figure since 2020, or 2017 if the COVID-19 disruptions are discounted. “For the first time since the end of 2020, nearly half of the basket items recorded price increases,” Kiwibank also remarked. In addition, core inflation— which excludes the more volatile categories of food and fuel—has also decreased to 3 percent from a previous 3.1 percent.

Despite these positive indicators, challenges persist for small businesses in the form of a depreciating New Zealand dollar, which has aggravated cost pressures in specific sectors, particularly retail and manufacturing. “Several firms within the retail and manufacturing sectors reported intensified cost burdens during the December quarter. We anticipate that the recent drop in the value of the New Zealand dollar has substantially contributed to this increase,” Huang noted. This trend needs to be monitored closely going into the year ahead, as it may lead to heightened prices for imported goods, presenting a potential upside risk for inflation rates moving forward.

As for monetary policy dynamics, the RBNZ is anticipated to continue easing its stance, with speculation around a 50-basis-point cut in interest rates expected in February. “Examining the CPI report card reveals sufficient disinflation data that supports continued rate cuts,” Kiwibank observed. “We firmly believe that both households and businesses are in dire need of financial relief, and it appears likely that the RBNZ will respond with additional support rather than withholding assistance.”

For small businesses, the easing inflation and projected rate cuts present a valuable opportunity to rekindle growth and enhance profitability throughout 2025. However, caution is warranted, as Huang notes, “The transmission of monetary policy to broader economic activities exhibits some delay. It will require time for businesses to translate their optimistic expectations for recovering demand into tangible increases in operational activities.”

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