New Zealanders are expected to face a tough year with inflation, housing and a tight labour market set to put the screws on the economy.

Economic predictions from ASB and the Institute of Economic Research indicates inflation has probably peaked and is likely to remain at high levels for a couple of years before dropping back to the middle of the Reserve Bank's target range of one to three per cent annual inflation.

House prices are also expected to continue falling through to the middle of next year.

NZIER principal economist Christina Leung says higher interest rates have reduced the ability of households to borrow, which is also weighing on housing demand and is a drag on retail spending.

"The latest retail sales data show a slowing in retail spending, and we expect this to continue as households hunker down to weather these latest headwinds of rising living costs and increased mortgage repayments," Leung says.

The labour market is expected to continue to fuel high wage expectations.

However, ASB chief economist Nick Tuffley says the labour market is like a double-edged sword.

"On the one hand, we're seeing continued strong wage growth which will outpace inflation next year and lift people's purchasing power, but on the other hand, this is going to be a real challenge for employers when it comes to finding and retaining people.

"Employers will need to start thinking longer term about how they cope with those challenges because we don't see much relief anytime soon."

-RNZ.