KEY POINTS:
Data due tomorrow is expected to show inflation is well within the Reserve Bank's desired 1-3 per cent range in the June year, but economists warn this will be something of a false dawn as price pressures are likely to remain for the rest of the year.
Market expectations are for a 0.8 per cent rise in the consumer price index (CPI) over the June quarter and for a 1.8 per cent gain over the June year, down from a 2.5 per cent rise in the March year.
But in a commentary headlined "Don't be Fooled", Westpac Institutional Bank economists said medium-term inflation pressures were alive and well.
Deutsche Bank chief economist Darren Gibbs said much emphasis had been placed on non-tradeables - or domestic - inflation, which he expected to show a 1 per cent gain over the quarter and a 4 per cent rise over the June year. Offsetting that is tradeables inflation running at just 0.6 per cent over the quarter, which will help keep the headline CPI inflation rate down.
Oil prices have played a big part in New Zealand's rollercoaster inflation ride over the past 12 months. They were largely responsible for a CPI spike up to 1.5 per cent over the June quarter last year, which took the annual rate to 4 per cent.
Conversely, an oil price drop and a change in Statistics New Zealand's weighting for the index meant the CPI fell 0.2 per cent in the December quarter last year.
Gibbs expected the next quarter to the end of September to be similar to the June quarter.
"But by the end of the year, if we get another chunky quarter and that minus 0.2 per cent [December quarter CPI] drops out, then we are going to be looking at 3 per cent, year-on-year," he said.
But the question remains - when will interest rates go down?
"I think the Reserve Bank will be quite content to see interest rates stay high for a considerable period of time," Gibbs said. "Once the housing market finally does slow, the last thing they are going to do is fire it up again."
The Reserve Bank's next official cash rate review is on July 26 and economists say there is a slight risk of an increase in the rate, which sits at 8 per cent. They think there is a bigger risk of another rise at some point.
Meanwhile, the Westpac commentary said petrol prices and the strong New Zealand dollar would be factors behind the expected drop in the inflation rate for the year.
This would bring inflation to below the middle of the Reserve Bank's target band for the first time in three years.
"In theory, this in itself could give some comfort if it pulls down inflation expectations," Westpac economists said.
"But firms' pricing intentions, and cost expectations from the Institute of Economic Research's recently released quarterly survey of business opinion for the second quarter, suggest that inflation expectations have a long, long way to fall before the Reserve Bank can relax."
Westpac said a 0.9 per cent rise in the CPI over the June quarter would bolster the chances of another interest rate hike this year.
