"There is still plenty of evidence that domestically generated inflation is continuing to gradually rise, and that is the part that can become persistent if the Reserve Bank doesn't act.
"So the case for an extended series of rate hikes over the next few years remains intact," said Westpac economist Michael Gordon.
"However, lower-than-expected inflation, combined with a higher-than-expected exchange rate and falling dairy prices, does reduce the degree of urgency for the bank to hike rates."
Westpac still expects 25-basis-point OCR rises next week and at the June review.
"But there's a question mark over our forecast for a fourth consecutive hike in July," Gordon said.
The tradables component of the CPI - those prices influenced by world prices and the exchange rate — fell 0.7 per cent in the quarter, to be down 0.6 per cent for the year.
Bank of of New Zealand economist Doug Steel said declines in tradable goods prices were widespread, indicating the broad downward price pressure being exerted from the strong New Zealand dollar.
If the current mix of a high dollar and falling commodity prices, like those at this week's dairy auction, persisted the chances of a pause in the Reserve Bank's tightening cycle later this year would increase, Steel said.
Another conspicuous contributor to the consumers price index rise was construction costs, which rose 1.7 per cent in Auckland and 1.2 per cent nationwide, making annual increases of 5.7 and 5.1 per cent (a six-year high) respectively.
ANZ chief economist Cameron Bagrie said the Reserve Bank would tolerate higher construction cost inflation as long as it did not filter through into generalised price increases.
Bagrie said: "So far so good."
