Analysts predict moderate inflation fall to around 3pc

A further fall in the inflation rate is expected when March quarter numbers are reported on Friday.

The average pick among market economists is for a 0.3 per cent rise in the quarter, which would pull the annual rate down to 3 per cent from 3.4 per cent in December and a peak of 5.1 per cent in September 2008.

Even with a weaker dollar imported inflation is not much of a risk. The global recession has driven down commodity prices and created a glut in manufactured goods. Domestic prices tend to be more "sticky" but five quarters of recession are weighing heavily on firms' pricing power.

In last week's NZIER quarterly survey of business opinion more firms reported they had dropped their prices in the past three months than raised them - the first time that has happened since 1999 - and more expect to do so over the next three months.

Demand is generally weak and the amount of slack in the economy is rising. "Inflationary pressures dissipate under such conditions," Westpac economist Doug Steel said.

The Reserve Bank and private sector economists expect the annual inflation rate to drop briefly below 1 per cent by the September quarter, as last year's spike in oil prices drops out of the numbers.

More important for interest rate policy is where the Reserve Bank expects inflation to be next year. In the forecasts it published last month it has inflation averaging 1.7 per cent in the first half of next year and 2.1 per cent in the second half.

In the light of last week's grim survey, Westpac expect inflation next year to be lower than that, around 1 per cent.

Deutsche Bank chief economist Darren Gibbs expects it to be comfortably in the middle part of the Reserve Bank's 1 to 3 per cent target band. In which case, he said, it should be content to leave the official cash rate at historically low levels for an extended period - well into next year.

In the March quarter the biggest contributor to a higher consumers price index is expected to be food prices, groceries in particular.

Petrol prices, though they rose during the quarter, were on average lower than in the December quarter and diesel prices were significantly lower, Steel said.

Even with the dollar having dropped 7 per cent in the quarter and 25 per cent over the past year, inflation in consumer durables is likely to be low, he said, given widespread reports of discounting and normal seasonal effects.

Steel and Gibbs both expect an increase in vehicle prices because of the weak dollar, despite the downward pressure from high stocks, feeble demand and tight credit.

For non-tradeables, which are unaffected by global prices or the exchange rate, electricity is expected to have its normal place among the increases, along with the annual increase in tobacco excise and education fees.

Westpac expects non-tradeables inflation to be 0.8 per cent in the quarter, the same as in December, which would lower the annual rate to 3.9 per cent from 4.3 per cent in December.

That is also the Reserve Bank's forecast. The bank took heart from a decline in construction costs in the December quarter, pointing to it as evidence that easing capacity pressures were flowing through to prices faster and to a greater extent that it had expected.

Gibbs forecasts a substantial reduction in inflation pressures across the services sector, sufficient to halve non-tradeables inflation from where it is now.