KEY POINTS:
A 12 per cent jump in petrol prices over the June quarter is thought to have pushed the annual inflation rate to 3.8 per cent, its highest for seven and a-half years.
Market economists and the Reserve Bank are picking a rise of 1.4 per cent in the June consumers price index, due out tomorrow, with about half of it coming from higher petrol prices.
Food prices are thought to have added a further 0.3 percentage point to the inflation rate.
But the bank, and therefore the financial markets, are expected to focus more on the outcome for non-tradeables or domestic inflation. It reflects those items, making up about half the CPI, where prices are unaffected by global prices or the exchange rate.
Non-tradeables inflation has proven "sticky" - stuck in the range of 3.5 to 4.7 per cent for the past five years.
ASB chief economist Nick Tuffley said the Reserve Bank had based the easing in interest rates it had signalled last month in part on the expectation that weaker economic growth would pull non-tradeables inflation down.
"A downward trend will not necessarily be evident this early in the slowdown. Indeed with a fairly strong 1 per cent forecast [for the June quarter] the Reserve Bank is not expecting evidence this early."
However, any sign that non-tradeables inflation was picking up would be some cause for alarm, he said.
Deutsche Bank chief economist Darren Gibbs expects to see some moderation in non-tradeables inflation. His pick is 0.8 per cent for the quarter, which would bring the annual rate back to 3.2 per cent from 3.5 per cent in March.
"Our estimate assumes a further notable decline in inflation pressure in the housing construction sector, despite upward pressure on raw materials prices," Gibbs said.
ANZ National Bank chief economist Cameron Bagrie expects a 1 per cent increase in non-tradeables inflation in the quarter. Recent business surveys had shown a strong increase in the proportion of firms intending to raise their prices in response to rising costs, he said. "Such cost-push behaviour is exactly what the Reserve Bank is trying to discourage."
But wanting to pass on costs is one thing, being able to in a weak economic environment is another.
"With evidence mounting that the economy is moving backwards and the labour market is starting to loosen, an aggressive turn in non-tradeables inflation could be just around the corner," Bagrie said.
The Reserve Bank forecasts annual inflation to climb further in the September quarter, hitting 4.7 per cent on an annual basis.
Westpac's chief economist, Brendan O'Donovan, believes it will be even higher, 5.5 per cent, pushing up inflation expectations which are already perilously high from the Reserve Bank's point of view.
"We think the potential for high current inflation to further pollute inflation expectations, along with the cumulative inflation pressure built up in the economy, will prevent an aggressive monetary easing despite a clear, and rather sharp, softening in economic growth," he said.
The market consensus, as reflected in Credit Suisse's swaps-based indicator, is that there is a better than 50:50 chance Governor Alan Bollard will start cutting the official cash rate on July 24, and that he will have delivered between five and six rate cuts by this time next year. That would still leave the OCR on the restrictive side of neutral, however.
Tuffley said a benign CPI outcome tomorrow would open the door for Bollard to cut the OCR this month, "but only if the Reserve Bank is confident enough that reduced inflationary pressure from the faltering economy will offset any impact soaring headline inflation has on wage- and price-setting behaviour."
PREDICTIONS
* Inflation is forecast to hit 3.8 per cent, up from 3.4 per cent in the March quarter.
* Petrol and food are expected to be the main culprits, accounting for two-thirds of the increase.
* Inflation is expected to approach 5 per cent in the September quarter.
