Inflation rate expected to dip slightly for quarter

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Inflation will be a hot topic next week as the financial markets prepare for Thursday's release of the Consumer Price Index for the March quarter.

Market expectations are for a 0.6 per cent increase in the CPI, which would bring the annual inflation rate to 1.7 per cent, down from 1.8 per cent in calendar 2011.

At that level, the CPI would still be well within the Reserve Bank's 1 to 3 per cent target range, and unlikely to stir any change in its current monetary policy stance.

ASB economists expect a 0.6 per cent gain in the index for the quarter, and for annual inflation to sink to bottom of the target band over 2012.

For the March quarter, ASB said a 14.5 per cent increase in tobacco excise tax on New Year's Day was likely to be the main reason for the quarterly gain.

Other factors included a lift in fuel prices, food prices, higher insurance premiums and increased rents, ASB said. The previous quarter's CPI result - a 0.3 per cent contraction - was surprisingly weak, so there was potential for a slightly stronger outcome this time around.

"Nonetheless, all indicators suggest that underlying inflation pressures remain subdued, and there is still little for the Reserve Bank to be concerned about," ASB said.

ASB expects inflation to be tame over 2012 as a result of a buoyant New Zealand dollar before rebounding in 2013.

By itself, the CPI release is unlikely to add much to the debate over fixed versus floating rate mortgages, because inflation is likely to remain subdued for some time to come, Shamubeel Eaqub, principal economist at the independent NZ Institute of Economic Research, said.

"My feeling is the yield curve is positive - with longer dated borrowing costs being higher than shorter term borrowing costs - which means on average you are probably better off floating than fixing," he said.