The Treasury expects the annual pace of inflation will slow even further in the March quarter as year-earlier petrol prices roll out of the equation and the government's 'fees free' tertiary education policy comes into effect.
In its monthly economic indicator, the government's financial adviser predicts the consumers price index will rise an annual 1 per cent in the three months ended March 31, slowing from a pace of 1.6 per cent in December when it was short of most forecasts, including the Reserve Bank's.
The Treasury said measures of underlying inflation remain subdued as the impact of earlier petrol price increases drop out of the annual calculation, and as new policies including the first year of tertiary education for free keep a lid on consumer prices.
However, inflation is expected to gradually pick up over 2018 and 2019 as capacity pressures bind further and global inflation begins to normalise, it said. In its half-year economic update released in December, the Treasury forecast annual inflation of 2 per cent in the June 2018 quarter and 1.9 per cent in June 2019.
The Reserve Bank will review monetary policy this week and is expected to keep the official cash rate unchanged at 1.75 per cent. The soft December inflation print saw some economists push out their expectations for the Reserve Bank to start raising interest rates until next year.
The Treasury's monthly update showed economic indicators in the December quarter "have been mixed", noting the slump in business confidence possibly reflected "uncertainty in the election and government formation period", whereas consumer confidence was still at a high level despite declines and spending on electronic cards "suggested little sign of a consumption slowdown".
It also said core crown tax revenue to the end of November was $500 million above its latest forecasts.
The government agency noted November building consents recovered from weakness in September and October, although "further strength is needed before we can expect residential investment growth in the first quarter of 2018", it said.
The Treasury said recent volatile weather conditions would likely have a small impact on overall output in the near term, although it will vary across regions and industries. Meat export volumes rose in December but dairy volumes were weak, it said.
The government department predicted a smaller current account deficit in the December quarter, with goods export values up 8.6 per cent, partly driven by exports of dairy, logs and meat.
"In the near term, this outturn suggests the goods deficit will narrow in the December quarter, supporting a further narrowing of the current account deficit," it said.
The annual current account deficit narrowed from $7.4 billion in the June quarter to $7.1b in the September quarter, but was wider than Treasury expected.