KEY POINTS:
The price of basic goods and services looks set to keep on rising, with inflation figures due out on Tuesday expected to show another jump in the quarterly consumer price index (CPI).
Economists are predicting the CPI will have risen between 0.7 and 1 per cent since the
December quarter, pushing the annual rate of inflation to between 3.4 and 3.7 per cent.
The Reserve Bank has a target of keeping increases within a 1-3 per cent band year on year.
Painfully for consumers, inflation is being driven by "must- have" items, such as food and petrol. The index tracks the weighted average price of a basket of commonly bought goods and services.
But while our high dollar is keeping the price of imported goods down, rocketing world prices are dragging up the cost of other basic items.
ASB Bank chief economist Nick Tuffley said almost a third of the 1 per cent quarterly increase he had forecast would come from food.
"While you can substitute some of things that have been going up in price - you can always choose soy products instead of dairy products, for example - avoiding food is a bit tough," he said. "Some things, like wheat prices going up, put pressure on a variety of prices."
Tuffley said the other big driver of inflation, petrol, was a cost many chose to absorb rather than reducing consumption.
"Yes, you can walk and you can take the bus, but what we tend to find is when petrol prices go up, you don't reduce your petrol consumption proportionately. You tend to spend more on petrol and leave a bit less to spend on other things."
Inflation was likely to stay high next quarter, Tuffley said, making it unlikely the Reserve Bank would ease up on interest rates this year.
"Even though the economy is slowing and the housing market is weakening, it's still going to take a while for underlying inflation pressure to decrease.
"Meanwhile, we've got these oil and food price increases that are hitting the economy as well."
Hoped-for tax cuts could also fuel inflation if they arrive earlier than the Reserve Bank's forecast of April 2009.
However, Tuffley said a faster-than-expected slowdown in the economy could well offset any extra spending from tax cuts.
The Reserve Bank will be keeping a nervous eye on business confidence when it reviews the official cash rate later this month. The NZIER's quarterly survey of business opinion for the March quarter hinted at bad news to come for inflation.
The survey revealed a sharp decrease in business sentiment, to a seasonally adjusted reading of 56 per cent net pessimism.
A net 59 per cent of respondents said their costs had increased in the past quarter and a net 45 per cent planned to raise selling prices to consumers.
Tuffley said, while the results made sense given the expected slow-down in the economy, the drop in confidence was out of proportion with how much the economy was likely to fall.