KEY POINTS:
Inflation in the March quarter was no worse than the Reserve Bank had expected, but no better either, and there was little in the data that might incline it to give borrowers a break any time soon, economists said.
The consumers price index rose 0.7 per cent, with half of the rise due to higher food prices. That pushed the annual rate to 3.4 per cent from 3.2 per cent in December.
A key measure of core inflation - the trimmed mean, which disregards the largest price rises and falls and looks at what happens to the broad mass of prices in between - was 0.8 per cent for the quarter, keeping the annual rate unchanged at 3.5 per cent.
Non-tradeables inflation - roughly half of the CPI where prices are not influenced by international competition or the exchange rate _ rose 1.1 per cent in the quarter, also keeping the annual rate unchanged at 3.5 per cent.
Such numbers would keep the Reserve Bank wary of further inflation pressure in the pipeline, economists said, coming as they did on top of last week's NZIER quarterly survey of business opinion which recorded a high proportion of firms intending to raise their prices and found scant evidence of any emerging slack in the economy
"A lot of inflation pressure is coming from areas the Reserve Bank cannot do anything about such as food, energy and petrol," ANZ National Bank chief economist Cameron Bagrie said.
Without a 20.5 per cent rise in petrol prices over the past year annual inflation would have been 2.5 per cent.
To bring inflation back within the bank's target band of 1 to 3 per cent, the pressure from interest-rate-sensitive non-tradeables areas like housing would need to drop markedly.
There were some tentative signs of that in the March quarter. Construction costs rose 0.9 per cent, the lowest rate for 5 years, reflecting a rapidly weakening housing market.
But that was offset by a 1.2 per cent rise in rents during the quarter, the strongest for four years.
"With landlords no longer enjoying capital gains and interest costs rising, rents are now playing catch-up," Bagrie said.
First NZ Capital economist Jason Wong said on an annual basis rents rose 3 per cent.
"But we know that this seriously underestimates increases being faced by new renters. A range of other data suggests rental inflation is running at closer to 7 or 8 per cent for accommodation that is newly rented."
Westpac and Deutsche Bank expect inflation to approach 4 per cent by the September quarter.
"We are not sure inflation expectations are anchored well enough to withstand a stream of annual inflation outcomes above the top of the target band, especially as inflation is being driven by goods and services people buy frequently," Westpac chief economist Brendan O'Donovan said.
Bank of New Zealand economist Craig Ebert said higher food and fuel prices tended to weaken demand for other goods and services, reducing inflation pressures.
As the year wore on the severity of the economic slowdown would gradually take precedence over backward-looking inflation data, he said.
By around December a lot would have become clear including how the credit crisis had panned out and the extent and nature of tax cuts.
