Inflation expectations have fallen from menacing levels in the Reserve Bank's latest quarterly survey of expectations, despite respondents taking a more optimistic view of the growth outlook than they did three months ago.
Expectations of inflation two years ahead dropped back to 2.86 per cent, having jumped to 3 per cent in the previous survey, a level equalled only once since inflation was brought under control in the early 1990s.
The result seems to vindicate one of the key assumptions in the bank's June monetary policy statement that "recent increases in surveyed inflation expectations will be short-lived".
The annual inflation rate hit 5.3 per cent in June, of which 2 percentage points could be explained by the increase in GST last October.
"The easing in two-year ahead inflation expectations reduces some of the pressure on the Reserve Bank in regards to inflation risks in the economy," ASB economist Christina Leung said. "There had been some concerns the high headline CPI may have flowed through to higher medium-term inflation expectations and affect wage and price setting behaviour."