Business

Underlying inflation forecast to rise

07:46 am on 14 April 2014

A small fall in food prices in the March quarter and a higher-than-expected New Zealand dollar are having a dampening effect on inflation.

Photo: RNZ

However, economists don't believe that will deter the Reserve Bank from raising interest rates again this month.

They predict underlying inflation has been picking up.

Economists surveyed by Reuters expect inflation between 0.4 and 0.6 percent for the March quarter and between 1.5 and 1.8 percent for the 12 months ended March.

The Reserve Bank has forecast a 0.5 percent quarterly increase and a 1.7 percent annual rise compared with the 1.6 percent outcome for calendar 2013.

Westpac chief economist Dominick Stephens is forecasting an outcome at the lower end of expectations.

He predicts inflation will remain steady at 1.6 percent and most categories are likely to continue a slow upward march in annual inflation terms.

Mr Stephens says lower than usual food price inflation in the March quarter will provide an offsetting force to keep annual inflation at 1.6 percent.

He says the high New Zealand dollar has been suppressing inflation for some time with the price of imported products falling.

"We do expect that over the next couple of years, if the exchange rate stabilises the suppressing effect of the rising New Zealand dollar should gradually disappear and inflation should gradually trend higher."

Figures last week showed food prices fell 0.3 percent in March after a 1 percent fall in February.

Food prices make up nearly 19 percent of the Consumers Price Index (CPI), the official measure of inflation.

ASB Bank chief economist Nick Tuffley expects the annual rate of inflation to go up slightly to 1.8 percent from 1.6 percent, so for the quarter itself a 0.6 percent increase is expected.

Mr Tuffley says the message is that inflation is starting to creep higher and an outcome of around 0.5 or 0.6 could reinforce that the Reserve Bank will lift interest rates later this month.

Last month, the central bank raised the Official Cash Rate to 2.75 percent from 2.5 percent, the first increase since July 2010.